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Value Beats Growth Over Long Term

- Alan Lavine and Gail Liberman

The perennial mutual fund question: Should you invest in growth funds or value funds?

Growth funds buy stocks in fast growing companies. These are outfits with earnings growing at more then 20 percent a year.

Value funds buy beaten-down stocks. Value stock prices are cheap based on the historical and future profitability of the companies.

Value stocks typically outperform growth stocks over the long term--say 50 years, according to Ibbotson Associates and Standard & PoorÕs. You may not, however, be investing our money for 50 years.

So what should you do?

Carl W. Marker, portfolio Manager of IMS Capital Value Fund & IMS Strategic Income Fund, says that growth has beaten value over certain periods. But that tends to occur primarily when the economy is booming. Examples: After World War II, and in the mid-1990s through 2000.

Today is a different ballgame. Undervalued stocks should outperform growth stocks.

"The economy is not booming and value has outperformed growth for five years running," he says. "This is the type of environment that favors value stocks." Value stocks rise in price when improvements occur in their sales and earnings, he notes, regardless of overall market direction.

Examples of what stocks Marker owns in his funds include:

  • Lucent. The stock is only selling at eight times earnings. It is a turnaround play, industry leader in a high growth sector.

  • Rite Aid. The stock is selling at just 10 times earnings. The drug store company should benefit from the aging population.

  • Cigna./b> The insurance company is selling at just eight times earnings, but profits are growing.

Beware: The market does not like companies selling at double-digit rates in relation to their earnings.

So what should you do? Value and growth stocks, according to financial research, take turns outperforming each other about every three or four years. Best bet: Own both growth and value.

That way you split the difference.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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