Saturday, July 16, 2016

The Parable of Messi and Ronaldo

On the Messi/Ronaldo debate, I have always come down on the side of the Argentine little magician. I like his style on the pitch better, I appreciate his determination and grit, etc. etc. His story of overcoming the liability of his smallness resonates with me, and so on.  Plus the issue of Ronaldo's blinding good looks, perfect physique, and seeming ego.

But in recent weeks we have heard the revelation that Messi has been sentenced to something like 21 months in jail for tax evasion, and then somebody on Facebook tapped me into the fact of Ronaldo's pretty substantial charitable inclination.  He was even voted the world's most charitable sports star.  And then there's the issue of his clear and indubitable deep desire to win the Euro, and his leadership off the field after injury took him out of the championship game. So maybe I've been judging a book by its cover.

(forgive the seemingly jarring transition and skeletal argument.  this is a stub of what should be a bigger, professional post). I wonder if there's not something similar going on with value and growth stocks.  Value stocks are supposed to win over time, it is one of the observed anomalies that undercut modern portfolio theory, or the idea that markets are perfectly rational.  But up until recent weeks, growth (stocks like Amazon, Tesla, high-fliers that capitalize on observed trends but may be capital-intensive as they grow) had been leading value for a long long time.  I actually just checked the numbers and value seems to have made a comeback for the time being, over time periods as long as 5 years.

Basically, the value story resonates with middle-class investors.  We like the idea that prudent, soberly run businesses should win over time. It's a turtle vs. hare thing, and many active and program-driven funds and ETFs capitalize on this belief.

But what if this bias has lowered the cost of capital for firms that look like value investments, encouraging them to be less efficient and effective stewards of other people's money?  I've heard this argument made about socially-responsible firms, and it kind of makes sense. If I were a CFO, I would consciously endeavor to make my firm look like a value investment.

Just sayin.

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