Sunday, May 8, 2011

Value Is Less Risky Than Growth

I just came across another interesting article on the web: "Are Value Stocks Riskier than Growth Stocks?" The author presented data showing that value stocks not only produce better return, they also come with less relative risks.

The author presented interesting discussion I would like to borrow. The author started by saying that most value stocks are perceived to be risky because they are "distressed", then he made a distinction between "distressed" and "risky" by saying
[M]ost value companies, although distressed, are not bankruptcy risks, and most in fact have earnings.
Then the author pointed out that, people also worried that "distressed" companies may go bankrupt during business downturn, while they might do good during normal business conditions. However, if this is the case, then value stocks have to under-perform growth stocks during business contraction, which is not the case.

The author then said that in fact growth is more risky because they are commonly associated to bubbles. And the sad thing about bubbles is
Although the technologies prospered, investors lost their shirts by hideously overpaying for their growth.
Finally the author mentioned interesting market behaviors that favor value over growth, which makes a lot sense to me.
Finally, there are behavioral issues involved. Even efficient marketeers will admit that because of the lack of persistence of earnings growth, growth stocks are priced higher than the present value of their future earnings and dividends. Further, it is well established that negative earnings surprises hit growth stocks harder than value stocks and, in the same vein, positive surprises benefit value stocks more than growth stocks.

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