Growth vs Value Investing AND Passive vs Active Investing

Hey guys, in this video we're going to talk about value versus growth and passive versus active investing. Okay. I know that you're probably thinking that's like the stock market. That's where it's commonly referred to, but I promise we're going to relate this to funds. Just hang tight here for a minute. But I wanted to start by just kind of covering the basics, right? Uh, you know, going over the characteristics. So value investing was actually first originated by Benjamin Graham, right? Uh, Warren Buffett definitely subscribes to his ideologies. If you go read the book The Intelligent Investor, it's a great place to start on value investing. Some of the characteristics of it: it's into stable companies, right? It's in cash flow industries. It's in, you know, companies that have had a track record, that have had 5, 10 years stable cash flows, and it's predictive. But, you know, a key feature of value investing is the intrinsic value is higher than market value. And what I mean by that is, you know, the, the fundamental valuation of the company is more than what the market perceives it to be. Um, and so in reality, um, it's, uh, it's a great investment. It's a value play, right? Because once the market realizes how much, uh, you know, this company or investment or opportunity is actually worth, Then you know it'll it'll autocorrect, right? So there's kind of this you know in finance there's this big debate, and you know if you go to classes they're going to ask you like are markets efficient, right? And that's basically saying does the mark and this is public market generally, but does that you know correctly price assets? Does the market is you know because it's a free market, right? People can buy and sell as much as they'd like. You know, it's supply and demand. Is the market efficient? Okay, and there's kind of that big debate, um, because value investing is saying no, it's not, because there's all these opportunities that are below market value that are actually worth more than what it's perceived to be. Um, so that's value investing, um, at its core, right? So growth investing, this is some of the characteristics, right? Tend to be Not always. Smaller stage companies tends to be, you know, earlier stage companies. A couple other, you know, characteristics. These stocks, if you're looking at, you know, public stocks, they tend to be more expensive. Another thing is that they actually tend to be more volatile, okay? Growth stocks tend to have higher PE ratios, right? And the reason, the whole, you know, strategy behind growth investing is that Look, this product or company has a, you know, attainable market. If the market accepts and utilizes this product or service, then, you know, their price is going to go to the moon, right? So, you know, it's really counting on future growth. So I know they, I said they tend to be smaller, but I mean, look at Tesla and, uh, Apple and Google, right? Those are growth companies, right? Why? Because they're constantly innovating, right? So value, just, uh, just for perspective, value stocks tend to be like, you know, the financial sector like bank stocks or utility stocks or oil stocks, you know, really those stable industries, okay? And then, you know, growth stocks can be, you know, they can be defined as a lot of different things. But there's something I wanna, you know, point out here. So on an average basis from 1926 to 2010, value investing outperformed growth investing. So if you invested in these stable stocks and underlying, you know, assets, they tended to do better than these growth stocks. But, uh, from 2010 to present, growth actually outperformed value. Now, obviously there were some years in there where, you know, obviously growth beat value and value beat growth and those, but, but on average, right, for the most part, um, You know, that's an interesting trend, right? And so you kind of see this turn of the decade in 2010. And why, you know, why does that happen? My personal thesis, right, uh, there's a lot of different reasons of why, but, uh, if you've ever read a great book, um, Post-Capitalism by Paul Mason, he talks about infotechnology. And essentially what that is is just technology, right? Softwares, media that populates 'Cause I mean, in our prior world, you know, one input equalled one output, right? A worker went to, you know, an hour of work equalled X amount of outputs, right? But now we have these machines and softwares that produce outputs. And additionally, not only that, to find information, right, on, you know, undervalued opportunities, it was hard, right? It was hard for investors to really find information on companies. And now we have an abundance of information. So actually another great book, an example of a value investor is, Sorry, a lot of books today, right? Um, Red Notice by Bill Browder. He opened the first hedge fund in Russia in the 1990s, and, you know, when he went out to find, um, you know, opportunities, he, uh, it was impossible. It was so hard to find information on these stocks and companies, right, in Russia in the 1990s. Um, but basically he would find like oil companies that were trading at like a 95% discount. So let's say an oil company in Russia had you know, 50 million barrels of oil. Okay. Um, and then the same, like a very parallel identical company in the US had 50 million barrels of oil. And what he found was that these Russian companies all over the underlying asset was the same. They were trading at like a 95% discount. So obviously he would publish these reports. He'd buy a lot of the stock and then publish these reports on them and, uh, you know, make a lot of money. But you think about that, and it's the market is smarter today than it was, you know, in the 1990s. Why? Like the average investor, I mean, look, I mean, we have YouTube, right? Like there are so many, there's so much information out there that markets can be more efficient. So my thesis kind of is that, you know, growth investing is is is here to stay, and it's because value investing is. Is based upon the fact that there's misinformation in the markets and the markets are mispriced. But I think our markets are just getting better and better priced, and it's harder to find those arbitrage opportunities, right? So that's kind of the difference between value and growth, right? Sorry, I talked a while on that. Um, I'll, uh, I'll go quicker on passive versus active. So passive investing is, um, kind of a buy-and-hold strategy. It's where you Do your research, you make an allocation, and then you just kind of wait, and then you sell, right? Active investing, however, is when you're constantly kind of in and out of positions. So I'm going to say in and out here. There's a lot of more obviously go Investopedia if you want a better, more in-depth definition, but that's at its core. Okay, so it's a little more self-explanatory, right? Where passive You know, you're relying on asset allocation and you're kind of making your benchmarks and you're sticking to it, right? Active is more like, oh man, this headline came out and we need to readjust. Or, you know, this, you know, Fed raised interest rates, so we need to react, right? It's more reactive. So these are kind of like the 2 biggest debates of which is better. So, I mean, you could look at passive and active like an ETF versus a mutual fund, right? Most ETFs are, you know, exchange-traded funds. They're kind of following an index, right? They're more passive in nature. Where mutual funds usually have a manager that you know kind of helps you know allocate and reallocate the positions. But let's let's go apart from this. I want to I want to get into how this relates to alternatives, right? Alternative investments and you know things of that nature. So if we look at this, if you were to kind of the reason I'm doing this is I want to give you a different lens. Into alternative assets, right? Of, you know, where they fit, how they fit into a portfolio, and why people would actually want to invest in venture or over real estate and private equity over, uh, you know, hedge funds. So let's, let's first define them in these 2 buckets, right? Um, so real estate— I, and obviously these are my classifications of these, they can be classified as whatever you want, but, um, just for you know, purposes of this video, I'm going to bucket real estate as a value play. Why? It's stable. It's, you know, you're really focusing on the intrinsic value of things. You're not going to see crazy growth in real estate. It's usually, um, you know, very, very consistent returns, right? You're focusing on cash flows. There's an underlying asset. I mean, most real estate funds are between 10% and 20%, right? And yeah, some can be crazy growth, right? Like if you're focusing on distressed opportunities or these crazy rehab and flips, But most of them are very stable in nature. Okay, I'm going to put private equity right on the line, um, just because— I mean, maybe a little more on value, because private equity, you're investing into value companies usually, um, not growth companies. You're investing into companies that have— are stable and have cash flows, and it's kind of like a management buyout, or, you know, you're infusing debt into the balance sheets and, uh, you know, flipping the companies that way. So, you know, that's kind of where private equity fits in. I'm going to put hedge funds next. They're— I would say they're more of a growth. Why? Because they're usually investing into growth industries. They obviously can invest in value, but for the most part, you're trying to beat the market. Okay, like that's your intent, is to trade better than the S&P 500, right? And, and add all these arbitrage opportunities in there. And then after, of course, venture is certainly, you know, a growth asset where you are really trying to 10, 20, 100x your capital, right? You're trying to invest in these early, early stage concepts and grow your, grow your money like crazy. So that's kind of where they fit in on value versus growth. In passive versus active, I'm also going to add, let's, let's add fund of funds in here. A fund of funds is where obviously a fund manager raises money and then identifies different fund managers and allocates the money with them. And in a fund of funds, I would say that's certainly a passive investment, right? Where because they're just doing all the upfront legwork, they're buying and holding. They have no active day-to-day in the management of the asset, right? And then obviously for all funds, right, fund managers in perspective, they're more active because they're really. Identifying those assets, implementing their value out of their play, and then selling out of it. But to get more asset-specific like we did over here, it's hard to kind of define real estate VC, but let's make a distinction between venture and private equity. Okay? So venture capital is certainly passive in nature. Why? Because you are making an allocation to these businesses, you're investing in them, and then you're kind of sitting back and you're Sure, you're advising and you're encouraging and you're making introductions, but at most you're usually just sitting on a board, right? Where in private equity, you're usually buying out the management. You know, you're really turning over the company and flip— like almost like you'd flip a house in real estate. You are flipping a company. Okay, so those are kind of the key distinctions between venture capital and private equity. Now, obviously there are advantages and disadvantages and a time and place for both of these types of investments. But for this video, I just wanted to, you know, help you think about alternatives in a different light. And then of course, you know, just as a little overview of value versus growth and passive versus active. Let me know your thoughts, what you guys think in the comments below. Thanks.