Gmo The Value Versus Growth Dilemma Essay Example

that sells below is inherent worth or that may be worth more after fundamental changes can consistently provide above average returns relative to the total market.

What are the differences between value and growth investing? What are their relative merits?

To begin with, looking at the B/M ratio, Cisco B/M ratio is very low, but CVS, R. R. Donnelley, and Manor Care have relatively high B/M ratio. As a value investor, GMO should not invest in Cisco, but invest in CVS, R. R. Donnelley, and/or Manor Care that has higher B/M ratios. On the other hand, looking at the P/E ratio, Cisco P/E ratio is highest among the other stocks and this can partly explain why GMO didn’t choose Cisco. If GMO choose to invest in Cisco, they have to pay 112. 7 dollar for 1 dollar return! Moreover, according it reveals that at the year 2000, the price of Cisco has reached 20 years high from year range of 1990 to 2010.

Looking at the EPS, Cisco has the smallest EPS compared to all the other stocks mentioned. This can be explained from the high price of Cisco in year 2000E. GMO can choose to invest in CVS, R. R. Donnelley, and/or Manor Care that has higher EPS, especially R. R. Donnelley that has the highest EPS of 2. 45. The LT EPS growth rate is very high for Cisco, but because EPS is low, it makes our projected 2003 LT EPS at 2. 7 and 2005 LT EPS at 4. 34. This assumes that the LT EPS growth rate is at 30% for every year!

On the other hand,

the R. R. Donnelley has the projected 2003 LT EPS at 3. 44 and 2005 LT EPS at 4. 32, with a modest growth rate at 12%. GMO 5. Would you invest with GMO? Since the S&P 500 Index and NASDAQ 100 Composite 5 years annualized returns are very high compared to GMO returns, as an investor, we would put most of our money in a fund that invest in S&P 500 Index and NASDAQ 100 Composite and maybe only 10% in GMO.

At the current environment with growth stock leadership, it is hard to put a lot of investment in GMO. The 5 years annualized returns of GMO Pelican Fund and Value Fund are 15. 57% and 17. 12% respectively. The 5 years annualized returns of S&P 500 Index and NASDAQ 100 Composite are 26. 73% and 41. 61% respectively. When the tide turns and value stock becomes the leader, we investors can switch back our investments to GMO value stock funds. This can be realized by observing the macro economic conditions, technological trends, and news.