Value investing works but why – some explanations

Value investing the way to go? Many studies of history have shown that value investing has worked. For example from 1980 to nowadays, value has beaten growth by 1.3% on down market months and growth beaten value in up market months by 0.4%. For this reason value stocks suit well to buy-and-hold portfolios.  More recent studies have shown that  financial strength of company makes it stronger performer. Usually people tell that more risk means higher returns but seems like it is not the case in all aspects.

 

Some performance comparisons

LCGrowthvsValue Value investing works but why - some explanations

Source: http://systematicrelativestrength.com/2010/11/22/value-or-growth-which-is-better/

 

SCccc-2 Value investing works but why - some explanations
Source: http://systematicrelativestrength.com/2010/11/22/value-or-growth-which-is-better/

 

Risk in growth investing

Comparison to growth stocks is of course relative and bad returns of growth will put points in favour of value. Overpaying for growth is the major problem that can happen with growth stocks. Forecasting company performance is not exact science and mistakes happen. And sometimes they are big. One study found that correlation of forecasts to actuals over one year perspective is very low.  Fama and French statet once that growth ratios will return to mean value from good year at 40% & year. And this makes sense because with very high growth rates numbers get easily so big in longer period calculations that common sense steps in. So it is the trust of investors for companies with high growth will continue and that badly ran company can manage to avoid bankruptcy that generate the bad performance tendencies.

One other thing is that when you are chasing the growth, you need to sell and buy stocks more often and this generates more transaction costs.

 

Some investing truths by Peter Berezin

  1. Analyst down revisions on small cap stocks tend to often right
  2. Analyst buy rating on large cap stocks tend to lose to the market on average
  3. Up revision of stock tends to lead to good performance on stock in next few months
  4. Therefore best performance comes when analyst upgrades a stock that has had a sell rating
  5. If estimates are widely spread in stock, that stock tends to underperform the market
  6. If stock price is well above analyst target, stock tends to underperform the market

 

Remember that with enough statistics investigations you can make pretty wild strategies to beat the market. That is because there is no risk in history.

 

Keep on investing!

 

Sources used: AAII journal and google to check some facts

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