Ask Colin

Are your value and growth models applicable to all market conditions and if not, when are they best used?

The simple answer is that you can use both of them in almost any market conditions. However, it is not really that easy.

The growth model is best used in a bull market. In fact it will tend to do better than the value model the further a bull market progresses. In a bull market the number of good value stocks tends to shrink and growth stocks are driven to high PE ratios, creating this situation.

However, in the early stages of a bull market, the value model often works better.

In a bear market, the situation is different. Growth stocks can be quite dangerous, because they are subject to sudden \d\r\o\ps if they are rerated for some reason. We have seen a lot of this happening in 2002. There is no reason not to hold them if they have moderate PE ratios and are clearly in uptrends. This is especially if they are starting a mark-up phase after a consolidation period. However, if they have high PE ratios and especially if they have formed broad consolidation zones, these chart patterns could easily turn out to be distribution areas and see a sudden break downward. They are best avoided until and unless they breakout upward again.

Value stocks are the way to go in a bear market on the whole, because they are far more defensive that growth stocks.