In the latest investment outlook on July 30th, bond king Bill Gross explored the key principles of investment, especially the choice between value and growth stocks, drawing on the experience from the game Monopoly.

Gross compared Monopoly game strategies with real-world investments, believing that in the early stages of the game, owning real estate is crucial, while in the later stages, cash is king, and timely adjustment of asset allocation is critical.

Gross believes that there is no absolute superiority or inferiority between growth and value stocks, but in the long run, value stocks often perform better due to their lower initial valuations and higher dividend returns:

Value stocks defined by the price-to-book ratio have an average annual return at least 4% higher than growth stocks, although surprisingly, their volatility is also higher.

Gross stated that if AI-related companies can increase US productivity from the historical level of 1-2% over the past few decades to 2-3%, growth stocks may substantially outperform value stocks.

But he considered this to be a gamble and recommended that investors hold both value and growth stocks, rather than allowing any one type of stock to become a monopoly.

The following is the full text of Gross's investment outlook:

A few years ago, I played Monopoly with my family in Bryce Canyon, Utah. The game not only gave my family a deeper understanding of me, but also gave me a new perspective on myself and the financial games in the real world. That night, I defeated them one by one and became the "bad father" - at least for that night - because the luck of the dice made me exultant while they went bankrupt one after another, and I was finally crowned as the king. The title of "Real Estate Tycoon" I won that night eventually evolved into "Bond King" in real life, all based on the experience I learned from the game.

In fact, the rules of the game are quite simple. In the early stages of the game, real estate is king, while in the later stages, cash is the ruler. The key is to adjust asset allocation at the right time. Buying the right real estate is certainly important, but not decisive. The orange area unexpectedly became the best investment, while owning Park Place, the blue area, may not be a good idea.

The choice between growth and value stocks in the investment world seems simple, but in the long run, there is no absolute superiority or inferiority between the two. According to my classic research in the Ibbotson Yearbook (1927-2014), value stocks defined by the price-to-book ratio have an average annual return at least 4% higher than growth stocks, although surprisingly, their volatility is also higher. Think about the comparison between Verizon and the dazzling "Seven Heavenly Kings" over the next few decades. This is basically like choosing between buying healthy stocks with low P/E ratios and buying growth stocks at 2-3 times the premium price.

Recall the (dot-com bubble) of 1999/2000; now, it has not grown significantly in 25 years, while during the same period, (value stocks) have grown fivefold (including dividends). You can find some exceptions, but in general, the initial valuation plus the high dividends of value stocks always outperform the low but gradually increasing dividends of growth stocks. Although "Apple" and other stocks performed well during the period, there are very few companies of its kind in the market. The game Monopoly conveyed the importance of diversified investments, holding orange/red and even railroad real estate, which not only had high rent but also provided cash flow when luck was not on one's side.$Cisco (CSCO.US)$There has been no significant growth for almost 25 years, during the same period.coca-cola (KO.US) has increased by five times (including dividends) over the same period.$Apple (AAPL.US)$Although growth stocks may outperform others, there are very few companies in the market like Apple. The Monopoly game highlights the importance of diversified investments, holding orange/red and even railroad real estate. These properties not only offer high rent but also provide cash flow when luck is not on one's side.

Monopoly also revealed valuable knowledge about our financial system. The $200 collected at the start of the game is similar to the Federal Reserve's behavior of increasing the money supply and total credit over time. Because the rules of Monopoly do not allow the amount of $200 to be increased, it is like a central bank practicing the gold standard. And because of this, the game ultimately ends with a monopoly winner.

Today, the Federal Reserve and other central banks can create the necessary credit to keep the economy running. However, too much credit creation can lead to inflation. Milton Friedman correctly pointed out that inflation is always and everywhere a monetary phenomenon, but the challenge he faced in the following years was how to define money. Money includes not only M1, M2, or M3, but also the credit hidden in the shadow banking system. Since Nixon canceled the gold standard in 1971, this credit has grown at an annual rate of almost two digits.

There are many other lessons in Monopoly board game, but there is not enough space in this outlook to discuss them in detail. However, one thing to note is that if ai companies can increase US productivity from the historical level of 1-2% over the past few decades to 2-3%, growth stocks may outperform value stocks. However, this is still a gamble and demonstrates the importance of holding value stocks in an investment portfolio. Although the recent short period of a few weeks, the market performance has begun to prove this point.

My value stocks include Verizon,$Energy Transfer (ET.US)$and some selected regional banks (TFC, KEY, CFG). Tobacco stocks have also received some attention, but currently they are priced high from a cyclical perspective.

Wishing everyone good luck in their investment portfolio - remember, in the long run, value stocks outperform growth stocks, unless ai creates a new era of productivity. You should hold some value stocks and some growth stocks at the same time, without allowing any one type of stock to monopolize.

Editor/Emily