Equity Portfolio Management (On Page 138, Book 3 of Schweser 138, themselves, stocks, expect, growth

NakedPuts

about Value Investing;
Schweser says;
justification for a value strategy;
value investors argue that growth investors expose themselves to the risk
that earnings and price multiples will CONTRACT for high-priced growth stocks.
what’s this “CONTRACT” mean?
growth investors expect stock prices will rise to the point P/E of growth stocks,
but this expectations is not valid for value investors(very risky)??
my understanding is right??
anyone help me..
thanks.

JonnyKay

Contract essentially means reversion to the mean. Since growth stocks have higher earnings (relative to invested capital, think ROE) and have higher market price multiples (because the markets are forecasting greater then “normal” earnings growth) eventually the market will stop assigning such high expectations (since the company will eventually enter a mature state) and the price of the stock will likely fall from its higher multiple and expected earning levels.
The growth company will eventually become a mature company and the characteristics of its stock price will begin to reflect the average earnings growth and price multiples of the market.
Value investors believe that growth investors expose themselves to the whim of the markets expectations of a growth company’s future performance, and that the fickle market can abruptly penalize growth stocks for not meeting expectations, whereas value stocks have some greater intrinsic value then currently priced due to the market mispricing the value of the company, its assets and/or its future earnings.