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Managing Value versus Growth with Options

Richard Croft
August 6, 2013
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Value versus growth… the debate continues! High beta stocks can provide oomph to the portfolio. Value stocks offer stability and dividend income.

The investment industry markets value because it is an easy narrative; “we are long term investors who buy good quality dividend paying well managed companies at a discount.” Long term means less portfolio turnover and lower costs, which presumably is good? Seems almost, well… perfect!

High beta stocks are more volatile, which means they have explosive potential and downside risk. Value stocks are less volatile, which can translate into lengthy periods where returns are dampened, or even stagnant (BCE Inc. and Suncor come to mind). Point being; low volatility does not necessarily mean less risk!

More importantly, as anyone following a value mantra will attest, there can be prolonged periods where the market rewards growth strategies to the detriment of value. But investors gravitate to value because they want perceived stability, whereas in reality their only real concern is downside volatility.

Options can provide an alternative approach that can work in all market environments. Good covered call strategies, for example, can mitigate some of the downside risk in high beta stocks effectively turning them into value plays. The cost is a capped upside, the benefit more stability.

Another approach is to buy calls on high beta stocks. A little more expensive, but with pre-defined downside risk a long call can take advantage of the explosive upside potential inherent in a high beta stock.

The point is, option strategies allow you to pre-define risk parameters that can be applied to any stock without a prerequisite that it pass a value screen.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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