This document analyzes value versus growth investing styles through the lens of Dick Mayo's dilemma at GMO about whether to continue focusing on value stocks. It provides an in-depth comparison of the two styles, discussing their different focuses, investment philosophies, risks, typical stock features, and strategies. The document also analyzes whether value investing is still the right strategy given changing economic conditions that have favored growth stocks in recent years. Calculations are shown evaluating specific stocks like Cisco, CVS, and RR Donnelley to determine if they are over or undervalued based on criteria like P/E ratio, P/B ratio, and expected long-term returns.

1. CASE ANALYSIS:
GMO: THE VALUE VERSUS GROWTH DILEMMA
Submitted to:
Mr. Sabin Bikram Pant,
Course Instructor: Investment Management,
Kathmandu University School of Management
Submitted by:
Group 4
Manita Pokharel (12324)
Murary Prasad Roy (12325)
Nikkey Shrestha (12330)
Shivshankar Yadav (12336)
MBA, Term-IV
February 25, 2013

2. Case Analysis: GMO: The Value versus Growth Dilemma
Synopsis
Investment is a widely discussed topic around the world and investors are guided by various
philosophies and investing styles. The case has discussed the benefits and risks associated with
both value and growth investing styles along with several challenges being faced by Dick Mayo,
(one of the founding partners and portfolio manager of GMO) in analyzing whether the value
investing strategy used at GMO has been able to prove a better strategy for the investors‟ or not.
The trend that was emerging in the particular economy, i.e. popularity of growth investing
strategy (price appreciation) and outperformance of growth stocks compared to value stocks, was
puzzling Mayo about market and investors‟ behavior. In this context, Mayo along with the
decision making team have also analyzed some value investment stocks like CVS, Donnelly, and
Manor for further investment prospective. With the value investing style that Mayo has been
focusing for the company, there is a concern whether continuation of same investment style as
considered by Mayo can generate relative benefits for the investors in that particular situation.
This case analyzes the merits and demerits of value and growth investing styles and relates to the
situation of Mayo in determining the investors‟ perception about the company‟s investment
strategy.
Key Issues
Dick Mayo has been facing a sensitive issue that is of concern for most of the stockholders.
Since the focus of the company has been investment in value stocks that have been mispriced
and that can provide benefits in the long term, Mayo is worried about the trend that has been
arising in the economy. The emerging popularity of the company‟s price appreciation in
investors‟ decision making had raised some serious questions regarding the investment
consideration in terms of value investors.
The major issue that has been explained in this case is “Can value investing still be a better
strategy in this changing economy? And how can the investors are convinced about benefits of a
particular investment style matching to their needs rather than deciding their investment based on
the market trends?”

3. 2
1. Value vs. Growth Investing: Differences (Merits/Demerits and Superiority)
The tremendous investment concepts and theories generated over years have been able to
distinguish various investment styles based on the strategies applied. Investment styles provide
investors with a vast number of approaches that may or may not fit their criteria. Two of the
most popular investment styles: Value Investing and Growth Investing have been discussed over
years, and decide which style is correct; yet is a matter of study over time.
Value investing considers buying stocks that are undervalued, but the value investment can
provide with benefits only if the company selected is financially sound and the stock mispriced
(undervalued) is based on temporary market inefficiencies.
Growth investing are considered for investment if the trend shows that they are providing with
above market rates of earnings growth, but they also carry the risk of the stock performance
below expectation of investors.
The value and growth investment style mainly differs in the way in which they are perceived by
the market and ultimately, the investors. Both investment styles seek for maximizing the returns
by seeking the lower priced stocks either underpriced in compared to intrinsic value or expected
high returns through growth of the company. Beside this, the given two investment styles can be
distinguished on following grounds:
Basis Value Investment Style Growth Investment Style
Focus of the
investors
 Finding an outstanding
company at a sensible price
 Value investors focuses on the
price (P) of the stock at the
expense of the earning (E)
 Finding a company with high
growth prospects with a
willingness to pay premium price.
 Investors focus more on earning of
the company rather than the price
incurred to acquire the stock.
 Emphasize on less tangible
characteristics such as sustainable
competitive advantages of the
selected company
Investment
Philosophy
 Identify the undervalued stock
with an optimistic view to
market correction
 Buy a stock no matter what its
price is at market and sell it for
more prices.

4. 3
Investment Risk  At bear market, prices of
stocks might fall dip further
with the market slump; at bull
market that appeared
overvalued at one time, the
prices might rocket further
along with the market.
 Difficult to identify the right
market timing i.e. to find the
price of company to buy and
the timing of selling
 Evaluation of stocks as „ good
value‟ is misread
 High probability of losing money in
short period of time.
 The market downturn hit growth
stocks far harder than value stocks.
For instance, the growth investors
lack the fundamental basis of
reasoning their investments thus
herd mentality can influence the
investor psychology which drive
them towards risk of huge price
swings.
 Future growth does not occur as
expected
Nature of stocks  Value stocks are considered to
be undervalued by the market.
 Traded at a lower price
relative to their fundamentals
or say trading at a discount to
„intrinsic value‟
 Investors purchases value
stocks in the hope that they
will increase in value when
the
 Growth stocks deals with the high-
quality, successful companies
whose earnings are expected to
continue growing at an average rate
relative to the market.
 Growth stocks may be seen as
expensive and over-valued
Typical Features  Low current price-to-earnings
ratios
 Low price-to-book ratios
 Higher dividend yield
 High price-to-earnings(P/E) ratios
 High price-to-book ratios
 Pay lower or no dividends and focus
on the capital appreciation
Strategy  Low P/E strategy: focus on
defensive, cyclical and out-of-
favor industry groups
 Contrarian Strategy –
interested in stocks with low
valuations relative to book
value
 Yield Strategy – purchases the
stock of firms with above-
average dividend yields that
are expected to maintain or
increase their dividend
 Consistent Growth Strategy –
follows high quality firms with
continually growing earnings
 Earnings Momentum Strategy –
Purchases the stock that display
accelerated earnings growth in the
near future.

5. 4
Business
Lifecycle
 Value investors consider the
mature companies or
companies in slow-growth
and companies that paid
dividends to shareholders
 The growth companies are merely
at the early stage of the company‟s
business cycle or have huge
potential to emerge in the market.
Neither value nor growth guarantees appreciation in stock market value because of the
investment risk associated with each. The superiority of any approach depends upon the nature
of the investors, market conditions or economic cycle, investment risk, etc. Both approaches
have their own merits and demerits.
For instance, Value manager may fall into the value trap believing that the market has
overreacted but what if that is not the actual scenario or manager fail to identify the correct
intrinsic price due to biases in picking out the calculating elements such as earning of the
company. Whereas the growth strategy may not perform as expected if the company fails to
materialize the expected growth.
In order to minimize the risk associated with each investment style, the investors can look for
holding both value and growth stocks since the growth and value investments is highly
correlated, so holding both investment styles offers no significant diversification benefits i.e. no
risk leads to no return.

6. 5
2. Is Value Investing Wrong Strategy in the New Economy?
From the case it can be analyzed that the time period that considered the issue was relatively
strong economy compared to the periods of economic downturns. As given in the case, the new
U.S. economy was strong with less significant inflationary effects, low unemployment,
increasing productivity. The influence of internet and technology was slowly observed even in
the investment environment. This was leading to investors‟ focus on price appreciation on
investments rather than the earnings growth.
Value investing can be a difficult approach for the investors, because the analysis of intrinsic
value can be done through use of different approaches. Since, during the new economic
condition, the value stocks have shown less performance than expected, it can create a doubt
among investors on whether the value investing strategy can provide benefits in the coming time
period. The earlier periods showed a distinct pattern on performance of value and growth stocks.
But, the trend had been disturbed. The investors not just passively waited for long term value of
stocks, but were rather interested in the stocks that could provide capital returns much sooner.
This signifies whether the value investing strategy sustain in long run in the midst of the ever
changing environment.
As in the exhibit 4, the cumulative return of BARRA S&P 500 Growth/ Value Indices vs. the
S&P 500, the value investment (BARRA Value) was raising high since January 1975 than other
investment styles i.e. growth investment style (BARRA Growth) and indexing investment
styles(S&P 500). After the 1997, the trend reversed and Growth investment indices rose higher
than other indices, the reason could be change in the investors‟ perspective towards the new
economy, arrival of new technology and long term growth prospects of the companies,
emergence of globalization and its inevitable impact over the competitive periphery of the
companies, change in investor‟s preference for risk return trade off, etc. This shows how the
growth investment styles has outperformed over the value investors with change in pace of time.
Similarly, the exhibit 1, Capital appreciation of major indices, shows that indexing investment
styles i.e. S&P 500 index and NASDAQ Composite index have outperformed the value
investment style i.e. Russell 1000 Value in both two year and one year index capital
appreciation. The lower capital appreciation would lower confidence in the investors.

7. 6
Analyzing the return from the different investment styles in the exhibit 2, Total Returns of
Certain GMO U.S. Active Funds and Relevant Indices, the return from GMO value investing
lays below the given indexing investment styles. As per the case, the 5 years return of GMO
Pelican Fund is lowest i.e. 15.57 in comparison to the NASDAQ 100 composite i.e. 41.61%.
This signifies how the use of automated technology can assure NASDAQ to outperform other
indices in the market.
From the analysis of the Exhibit 1, 2, and 4; the trend shows that with the change in economy
pace the investment styles too change. So, the superiority of any investment styles whether
value, growth, momentum and indexing are highly influenced by the external factors such as
economic cycle, change in technology, inflation level, customers‟ confidence level, availability
of the information, accuracy of the fundamental analysis, etc.
Thus, any investment style by itself may not be right or wrong, but the proper strategies in
investing and generating returns at correct time is very crucial for the decision makers.

8. 7
3. Why wouldn’t GMO include Cisco System, an otherwise excellent
company, in its portfolio at this time? Why is it willing to consider CVS or
RR Donnelley? What are the long term expected returns for those stocks?
Calculation for Stock undervalued/ overvalued identification :
In 2000 Cisco CVS R.R
Donnelley
Manor
Care
Current price
PS
132.06 28 19.38 12.56
Book value per
share
5.01 9.46 9.3 9.58
EPS PS 1.17 1.8 2.45 1.28
LT growth
Rate
30 17 12 15
Treasury bond
rate
Given 6.1 6.1 6.1 6.1
Yield on AAA
rated bond
Federal Reserve Economic
DataLink:
http://research.stlouisfed.org/fr
ed2
7.04 7.04 7.04 7.04
Calculation
Price/ book
Vale
26.36 2.96 2.08 1.31
Price/ earnings 112.87 15.56 7.91 9.81
Price for
standard
( ) 69.44 66.29 68.99 42.70
Expected LT
rate of return on
stocks
( ) 9.2 Given (0.23
(1+.17))/28+
0.17= 17.9%
(0.88
(1+.12))/28+
0.12=
17.08%
15% same
as growth
rate

9. 8
Decisions basis Decision criteria for value
investors
1. PBV ratio lower is the best Overvalued undervalued Undervalued Undervalu
ed
2. PE ratio Lower is the best Overvalued undervalued Undervalued Undervalu
ed
3. Graham's
method
If the stock traded at less than
calculated price, buy the stock.
overvalued
(132.06 >
69.44)
undervalued
(28<66.29)
undervalued
(19.38<69.99
)
undervalu
ed
(12.56<42.
7)
4. Expected LT
rate of return on
stocks
Higher the better Overvalued undervalued Undervalued Undervalu
e
Calculation of long term Real rate of return to the current shareholders
Years Cisco CVS RR Manor care
1999/2000 (0) -132.06 -28 -19.38 -12.56
2000/01 (1) 0 0.23 0.88 0
2001/02 (2) 0 0.23 0.88 0
2002/03 (3) 0 0.23 0.88 0
2003/04 (4) 0 0.23 0.88 0
2004/05 (5) 0 0.23 0.88 0
2005/06 (6) 0 0.23 0.88 0
2006/07 (7) 0 0.23 0.88 0
2008/08 (8) 0 0.23 0.88 0
2008/09 (9) 0 0.23 0.88 0
2009/10 (10) 318.82 134.82 61.071 50.812
IRR 9.21% 17.45% 14.94% 15.00%
-Current 30 yrs T-bond yield
-inflation rate estimate
6.1%
2.0%
6.1%
2.0%
6.1%
2.0%
6.1%
2.0%
Real return to current share holders 1.1% 9.35% 6.84% 6.9%
Note: we assume growth in price is same as LT earnings growth rate in future as assumed by
GMO analysts in exhibit: 5 to calculate future market value (i.e. in 2009/10)

10. 9
Analysis:
From the various calculations, now we can analyze that why GMO did not include Cisco system
in its portfolio rather than CVS, and Donnelley.
1. Price/ Book value (Book Value Multiples)
From the given information we have calculated PBV ratio. Where, the book value of equity
measures what accountants consider to be the value of equity in a company, and the market value
of equity is what investors attach as a value to the same equity. PBV ratio shows price of share in
market as compare to the value of share in balance sheet. Investors have used the relationship
between price and book value in a number of investment strategies, ranging from the simple to
the sophisticated.
In this case, PBV ration of Cisco system has 26.36 that is more than others, means investors
were paying more than what accountant considers its value so as a value investor it is not a better
choice but the CVS corporation, RR Donnelley and Manor Care are. In other words Cisco is
overvalued in market whereas CVS and RR are undervalued. These lower PBV ratio compelled
value investors to invest in these stocks in a belief that their market price may increase in future.
So, on the basis of PBV ratio we support his choice of CVS Corporation and RR Donnelley than
Cisco system.
But, sometimes it may not be good basis for decision making because low PBV ratio may
operate as a measure of risk, since firms with prices well below book value are more likely to be
more risky, financial trouble and go out of business. So we need more calculation to justify this
decision.
2. P/E ratio:
Investors have long argued that stocks with low price earnings ratios are more likely to be
undervalued and earn excess returns in future. We have also used this ratio two compare these
stocks. P/E ratio of Cisco system in 2002 as calculated above is 112.87 and 30 times in 2009
which is much more than others. The value investor believes that the stocks with low price-
earnings ratio are undervalued and so there may be increase in price of such stocks in future so,
CVS and RR are preferable than Cisco on the basis of P/E ratio.

11. 10
Although P/E ratio was the first of Ben Graham‟s ten screens for undervalued stocks there are
some pitfalls of this tools that can mislead us. If earnings are high not because of a firm‟s
operating efficiency but because of one-time items such as gains from divestiture or questionable
items such as income from pension funds, this may lead to lower P/E ratio but not ensure future
returns from that stock.
3. Graham’s pricing method:
Ben Graham a success investment value investor had used
( )
formula to
calculate price and compare with current market price of stocks to ensure overvalued and
undervalued of the stocks. If calculated price is higher than traded price, value investor would
buy the stock.
The calculated price of Cisco system is 69.44 which is lower than current market price i.e.
132.06 so we suggest not to invest in this stock. Meanwhile, calculated price of CVS and RR
Donnelley and Manor care are 69.29, 68.99 and 42.70 which are higher than current market price
of these stocks i.e. 28, 19.38 and 12.56 respectively. So, on the basis of Graham‟s pricing
method Cisco is overvalued but others are undervalued.
4. Expected long term rate of return on stocks:
This is another method to evaluate if the stocks are undervalued/ overvalued. This gives same
result as Present value (PV). Higher the rate of return lower will be the present value which
implies that the stocks having higher expected return are undervalued and so it may give higher
return in future. Thus, on the basis of this criterion, Cisco system‟s stock is overvalued where as
CVS, RR and Manor care are undervalued so it‟s better to buy these stocks than Cisco.
5. Real rate of return (Implied adjusted IRR):
The above all four decision making criteria help to identify which stock is undervalued or
overvalued, and then to select the undervalued stocks. But this tool helps to understand how
much real return does each stocks will provide in future if they sell at intrinsic value. In this
calculation we first calculate 2009th
year‟s implied market value per share of each stock
assuming that growth in price is same as long term growth rate.

12. 11
The result shows that even growth rate of Cisco system (30%) is higher than others whereas its
real rate of return is much lower than each of above firms. From calculation, the real return to
current shareholders for long term from Cisco system is only 1.1% but the same from CVS, RR
and Manor care are be 9.35%, 6.84% and 6.9% respectively.
So, as value investor, GMO did not select Cisco, although, it had higher growth rate because of
two reasons:
1. Cisco is overvalued (illustrated by the above four tools) where as others are undervalued and,
2. The long term expected real rate of return from Cisco system is much lower than others
(illustrated by tool 5).
4. Should GMO change its strategy now that the world has seemingly turned
against it? Would you invest with GMO? Why? Why not?
GMO was established as an institutional investor that used a fundamental bottoms-up approach
and focused on out-of-favor companies (perceived to trade at less than intrinsic value) that was
less preferred by most investors in the market. With the inclusion of international investment and
development of quantitative investment techniques, GMO was able to establish a unique identity
as a value investor. The value investment strategy of GMO seemed to be providing with positive
values during the period of the 1980s to early 1990s. Outperforming the S&P Index on an
annualized basis by around 2%, the company grabbed the opportunities through value investing
in that time period.
Although most of the time, the passive screening through use of certain financial calculations,
basically the Price to Earnings, Price to Book, Price to Sales and GMO‟s proprietary dividend
discount model are used for the analysis of stocks‟ performance, some active strategy have also
been under consideration, for e.g. in the case of Storage Tek, Mayo identified opportunity if
management team could be restructured and focus could be made on the competitive advantages
of the company.
The strategy used by the GMO being a value investing focuses on the fundamentals and intrinsic
value of the investments. Following extensively value investing style can be problematic if
following pitfalls of the value investment are ignored:

13. 12
 Value Trap
The common hazard that reduces the expected return from the value investment is value trap
which occur when the hidden value that investors think they can see in a company fails to
materialize.
The reasons could be poor management, low return on company assets or default risk, etc.
For instance, in 2005-2007, the investors failing to ask about the company‟s debt covenants
faced major decline in the value of the stock due to increased default risk after the reduction
of credit lines in 2008.
 The Perils of the P/E Ratio
Depending upon P/E ratio for making investment decision may lead to nowhere because
simply low P/E return does not guarantee a good return. The low growth prospects or
(temporarily) low tax charges, manipulation in earning, etc. can the result behind low P/E
thus the reason behind P/E ratio should matter most rather than the degree of the ratio.
 Market Timing
One of the major considerations is sell the stock with right market timing. But most of the
investors fails to identify the market timing and often falls in trap such as „Selling before
boom‟ and „Buying before the crash‟. Thus, the investor fails to grasp the optimum benefit
due to wrong market timing despite having wonderful portfolio.
 Behavioral Finance
The psychological factors often influence the investment decision of the investors. Lack of
trust on own fundamental analysis and instincts, lack of proper information, following the
rumors in the market and responding to them, etc. would not let the investors to materialize
its investment philosophy.
Based on the above factors and change in environmental factors, some aspects that need
consideration under the investment strategy are given below:
 The risks associated with the investments in the particular stocks can be analyzed properly.
Since, the risk is linked with returns for the portfolio managing companies, the degree of

14. 13
volatility in the fundamentals and performance of price in relation to book and earning values
over years can be considered.
 GMO can also consider the use of new technologies and internet to improve the processes of
evaluation of the investment market. New perspective of value investing can be considered to
bring improvements in the decision making process.
 The GMO should focus on use of variety of different valuation tools apart from the P/E ratio.
 Encouraging the investors for avoiding any kind of behavioral biases through proper
counseling.
5. What kind of stock (value or growth) has potential for long term gain in
Nepali stock market? Why?
As risk adverse investors, if GMO considers above recommendations it would be fair enough to
go with its strategy. But with pace of time, I would not like to totally rely on the value
investment style because of some investment risk associated with it. Thus, I would focus for
diversification benefit i.e. going for blend of the investment styles by adopting strategy flexible
enough to counter the challenge placed by the emerging economy and other related factors.
The general investors of Nepal do not perform fundamental analysis of the company rather they
generally invest on the basis of crowd psychology or whim. The major concern for the investor
while investing is, stock price rather than earnings. The majority of the players in the stock
market rely on the benefit of the short-term capital gain rather than the dividends and bonus.
Also, there are few big players, who buy share in bulk and they can make significant impact
upon the share price of the company by excessive buying or selling, thus decreasing the
efficiency of the stock market. Generally, Nepalese investors buy the undervalued stocks and sell
them if they see any rise in the stock price to get the capital gain. Though the investors do not
perform any fundamental analysis and calculate P/E ratios of the company but unknowingly they
invest in the stocks having low price (low P/E ratio). The investors assume that the earnings of
the company will not significantly decrease over the time. This goes well with the theory which
tells that, “Any fund that invested in stocks with low price earnings ratios, relative to the market,
is categorized as a value fund.” Looking from this angle we can say that, Nepalese investors
prefer value investing strategy over the growth strategy. However, if we see the index points

15. 14
gathered by the NEPSE during the last one year (2012), it implies that Nepalese investors also
prefer growth investing strategy.
NEPSE index has seen over 539 points in 2013 however, we cannot say at present it is bulls
market. A bull market is one in which prices of a certain group of securities are rising or are
expected to rise. After the quality performance in 2012 where NEPSE crossed 400 points, we can
say the current stock market is in transformation phase. In other words we can say that, Nepal
stock market is on the way to bullish market. Thus, stock price of many companies which were
undervalued and below the intrinsic price will move up and equate the intrinsic price or rise well
above the intrinsic price. Looking from this angle, one can say that it‟s perfect time for
implementing the growth investing strategy, which says that, “Growth investing required a
degree of faith that company would eventually deliver on the implicit promise of additional
economic value through the above-average growth”. Thus, the general investor see the future
growth prospects of NEPSE and the companies listed in the NEPSE and hence they invest in
shares of those companies which has growth prospects to take advantage of this growing phase.
However, this is only the single side of the coin and other side must not be ignored. As we can
see that the political consensus is yet to see the dawn and if the consensus does not happen in the
near future then stock market might see the downfall. Such negative outcome might go against
the growth investing strategy (in growth investing strategy investor choose the company having
growth prospects and rely on the implicit promise of additional economic value through above-
average growth).
Let us evaluate types of stock (i.e. value investing or growth investing) preferred by the investor
in Standard Charted Bank and Nepal SBI.
For Standard Charted Bank, Nepal
The average trading price in the stock market during 2009-10, 2010-11, and 2011-12 were NRs.
3625, NRs 1962 and NRs. 1585 respectively. During the year 2009-10, 2010-11, and 2011-12,
the P/E ratio was found out to be 42.23, 25.9 and 24.78 respectively. During these three years,
we can clearly see that when the P/E ratio was high (i.e. 42.23 during 2009-10), the average
stock price was also very high (NRs. 3625 during 2009-10) and when the P/E ratio was low (i.e.
24.78 during 2011-12), the average stock price was also very low. This goes well with the theory

16. 15
of growth investing strategy, where investor focuses on high P/E ratio. It is also to be noted that
market has correctly identified the efficiency of Standard Charted Bank, Nepal and also mostly
rational investor invest in blue-chip bank like Standard Chartered. (Note: Information regarding
P/E ratio and average stock price of bank is given in Annex1)
For Nepal SBI
The average trading price in the stock market during 2009-10, 2010-11, and 2011-12 was found
out to be NRs.1102, NRs 610 and NRs. 519 respectively whereas, the P/E ratio was found out to
be 31.28, 22.73 and 27.69 respectively. Unlike the Standard Charted Bank, Nepal SBI bank stock
price was not directly proportional to the P/E ratio. For example: when average the stock price
was highest (NRS. 1102) the P/E was also highest, which suggest that investors are growth
seekers. But in 2010-11, when the P/E ratio was low (as compared to 09-10 and 11-12) the
average stock price was high. Also, the average stock price was only NRs. 519 when P/E ratio
was comparatively high. Here, it‟s very difficult to identify the types of stock (value investing or
growth investing) as the market has not behaved rationally. The market is yet to identify the
efficiency of Nepal SBI. Thus, in this case we cannot say implicitly whether the investors are
following the value investing strategy or growth investing strategy. (Note: Information regarding
P/E ratio and average stock price of the bank is given in Annex1).
Similarly if we evaluate most of the companies of Nepal and their fundamentals we cannot find
same trend of correlation between the P/E and stock price of the company. This unusual
relationship between the P/E and stock price indicates that, we can‟t explicitly find out which
strategy the investor of Nepalese market is following.
Thus, if warren buffet and Benjamin graham who were well known for value investing, were to
decide investing in NEPSE, they also have to think twice before taking any strategy to invest in
Nepal. Because Nepalese market is not following any particular pattern and most of the investor
do not do any fundamental analysis of the company before investing.
Thus, we cannot say that only a particular type of strategy (value investing and growth
investment) the Nepalese investors preferred. So after analyzing these trends and market
situation, we recommend the mixed approach that takes into account, both types of investment
strategies. One can choose the stocks from secondary market that have low P/E, high P/B, high

17. 16
EPS, good dividend yield and have growth prospects as well. The accumulation of pros from
each of the strategy (values investment and growth investment strategy) and reduction of as
many of the cons as possible will be the optimum solutions. So, in Nepal the mix of both value
and growth investing strategy may be beneficial according to company‟s brand, investors profile,
market situation and trend (volatility).
Conclusion
The presence of complex investment environment makes the decision making on the investment
style a difficult process. With the emergence of various advanced technologies; quantitative and
qualitative basis of analysis; etc. different investment styles have been emphasized by scholars
and analysts. Among the most widely used concepts, value investing and growth investing are
discussed and compared by supporters of those concepts. The value investment style focuses on
the buying firms that have been mispriced and have potential to be corrected in future. On the
other side, the growth investment is concerned with the stocks that have been showing above
average growth than the market. The concept seems contrast but each of those investment styles
is unique.
As discussed in this case, the value investing that has been the distinct feature of GMO has made
it successful in the market. The growth investments are growing popular, yet there is always a
good prospect for value investment as well. The growth investment is done through assumption
that market is efficient, but the market efficiency is more of idealistic concept. In the market
where efficiency drives some investors, some are encouraged by the concept that there are
inefficiencies in the market and so it leads to information gap which results in some undervalued
stocks too.
The investment strategy should be flexible enough to accommodate the changing environment
demand without violating its investment philosophy. So, the use of any strategy can bring good
returns if the analysis is done in a more scientific way. The expected result can be achieved
through use of any particular investment only if the factors such as market timing, behavioral
biases, proper analysis of the available information using variant financial tools, investors‟
confidence level, economic factors like inflation rate, employment, GDP, etc. are considered
while making investment decisions.

18. 17
In context of Nepal, the level of information correctness is a matter to consider. Also, market
situation, trends are needed to evaluate where mix of both strategies may be appropriate.
Lessons Learnt
The selection of an investment style is a complex process and requires proper analysis of various
factors among which the return and risk expectation of investors is the foremost one. Since,
every investment style has its‟ own unique benefits and risks, some important lessons learnt from
the case analysis are as following:
 Investment style in itself is not the key to success in a complex investment environment.
Depending upon various factors like the nature of returns/gains expected, business lifecycle,
etc. the investment strategies can be decided and implemented so that investors‟ can be
benefitted.
 With change in economy, one investment style selected may outperform the other investment
style. Sometimes change can be useful, but following the market trend without proper
analysis may not always ensure shareholders‟ wealth maximization.
Limitations
Although the case has been analyzed through various studies related to investing styles, there are
certain limitations too:
 The different investment styles have been successfully used by various analysts during
different time period. So, deciding one investment style as right and the other as wrong can
be vague.
 The information on the various investment styles show varied interpretations, so the merits
and demerits of any particular style can be distinct which may not be related with the other
investment style.

19. 18
Annex 1
1. Quarterly report of Nepal SBI(2009-10)
Bank P/E Ratio Share Price
09-10 10-11 11-12 09-10 10-11 11-12
SCB Nepal 42.23 25.90 24.78 Max
Rs 6500 and
Min 3479
Max
Rs. 2876
and Min
2060
Max
Rs.2019 and Min
Rs.1319
Nepal SBI 31.28 22.73 27.69 Max Rs
1779 and
Min Rs 556
Max 1905
and Min
556
Max Rs Rs 764
and Min 401

20. 19
Average stock price= NRs. 1102
2. Quarterly report of Nepal SBI (2010-11)
Average Stock price (2010-11) = NRs. 610
3. Quarterly report of Nepal SBI( 2011-12)
Average stock price (2011-12) = NRs. 519

21. 20
4. Quarterly report of SCB, Nepal (2009-10)
Quarter (Months) Maximum Share Price Minimum Share Price
First Quarter 6500 3,680
Second quarter 3770 3,251
Third quarter 3,333 2,799
Fourth quarter 3,470 2,403
Average Stock price= NRs. 3625
5. Quarterly report of SCB, Nepal (2010-11)
Quarter (Months) Maximum Share Price Minimum Share Price
First Quarter 2,876 2,060
Second quarter 2,233 1,819
Third quarter 2,070 1521
Fourth quarter 1836 1280
Average Stock price= NRs. 1962
6. Quarterly report of SCB, Nepal (2011-2012)
Quarter (Months) Maximum Share Price Minimum Share Price
First Quarter 1,319 1,470
Second quarter 1,601 1,290
Third quarter 1,455 1,302
Fourth quarter 2,215 1,479
Average Stock price= NRs.1585

22. 21
References
http://winninginvestor.quickanddirtytips.com/what-is-value-investing.aspx
http://www.fool.com/investing/value/2010/01/14/is-value-investing-dead.aspx
http://www.dows.com/Publications/growth_versus_value_investing.htm
http://www.capatcolumbia.com/essays/value%20vs%20growth.pdf
http://americancenturyblog.com/2011/01/key-success-factors-for-value-investing/
http://www.bdfwealth.com/Growth-Stocks-vs--Value-Stocks.c1022.html
http://www.jpmorgan.com/tss/General/Investment_Style/1159369368373
https://www.unience.com/blog/secuoya23/five_pitfalls_for_value_investors