Value Consistently Outperforms Growth

Growth believers, don't argue with me cause I'm not the person who made such a big statement. I just came across an academic paper titled "Value Investing and the Business Cycle". It's about 10 pages long but mostly filled with easy-reading charts. I don't want to bore you with their data, I just jump directly to their conclusion.

Although developed in the 1920s, value investing is still a major investment strategy. This research examines value investing in the context of the business cycle.

The study compares a value-oriented portfolio with a growth-oriented portfolio in an expansion and a contraction period of the business cycle. The value portfolio includes stocks with a high book-to-market ratio (B/P), earnings-to-price ratio (E/P), cash flow-to-price ratio (C/P), and dividend yield (DY), while the growth portfolio contains stocks with low values of B/P, E/P, C/P, and DY.

Three risk-adjusted performance measures—Sharpe (total risk-adjusted), Treynor (market risk-adjusted), and the information ratio (portfolio-specific risk-adjusted)-are used to compare the performance of the two portfolios.

Evidence suggests that the value portfolio consistently outperforms the growth portfolio throughout the business cycle.

And in their concluding remarks, the authors again articulated that

This superior performance is robust for all economic conditions, meaning that investors will be better off investing in stocks with high valuation ratios versus stocks with low valuation ratios regardless of economic conditions. The benefits of value investing are even greater during periods of contraction than during periods of expansion.

So it appears, based on their research, growth stocks have chances only during expansion periods. But even during expansion periods, value stocks still outperform.

Don't ask my opinion on this. I'd say this research paper is interesting.