This Strategy Has Beaten Growth Investing 94% Of The Time

October 17, 2017

This Strategy Has Beaten Growth Investing 94% Of The Time

  • I’ll analyze market data since 1927, and look at growth versus value returns.
  • I firmly believe that value investing returns can be further increased by applying a bit of common sense.
  • The differences in risk and returns are staggering, but few will actually become value investors.


It’s almost funny that Eugene Fama, the Nobel prize winner and face behind the efficient market craze, has evolved over time and acknowledged that value investing beats growth.

The two market anomalies that show how markets aren’t efficient after all are size and value. The findings were published in the now famous 1993 Journal of Financial Economics article by Fama and French, Common Risk Factors In The Returns On Stocks and Bonds. Markets aren’t efficient and you can easily beat the market by following a value strategy and by buying small caps (stocks with a market capitalization below $2 billion).

In today’s article, I’ll discuss Fama and French’s research and why value beats growth. I’ll also add a bit of common sense to the investment law as beating growth and the general market is ok, but why not make it even better as doing so isn’t that difficult.

The Scientific Proof That Value Investing Is Always The Way To Go 

Apart from the extremely valuable research Fama and French have done, their data is freely available online.

I’ve borrowed the data, and the figure below shows you the 10-year rolling difference in returns between the markets’ value and growth portfolios since 1927. The value portfolio is created by putting into it all the traded stocks with the lowest 30% of price to book ratios, while the growth portfolio is created with the stocks that have a price to book ratio in the highest 30% range as high price to book value typically describes growth stocks. The results are incredible.

Figure 1: Value versus growth over the last 90 years with 10-year rolling returns. Source: Fama and French data.

On average, a market value portfolio has beaten a market growth portfolio over 10 years by 4.6 percentage points per year. A growth portfolio has beaten a value portfolio only from 1929 to 1930, 1999 to 2004, 2005 to 2006. So in just 6 years since 1927.

I’ve made a quick calculation just to show you how big of a difference 4.6% per year actually is. If the market average was 8%, then a growth portfolio would return 5.7% and a value portfolio 10.3%. On a $100,000 portfolio over 10 years, the difference is $92,455, or almost 100% of the initial portfolio. ($100,000 at 5.7% per year is $174,080, and at 10.3% is $266,535).

If Value Always Beats Growth, Why Isn’t Everyone A Value Investor?

Investors tend to follow human nature and look for investing shortcuts, excitement coming from growth, and promises of outsized returns. Value investing, on the other hand, is inherently boring. All you need to look is at the price to book value which usually delivers boring companies that have low price to book values. There aren’t many exiting growth prospects, but there is a margin of safety in the related book value of the underlying assets and stable earnings.

The problem is that growth works fine as long at the there is an uptrend in the economic cycle, but as soon as there’s a recession, the growth stops and many of those companies that were promising great things suddenly find themselves with no opportunity for further capital injections and go bankrupt. On the other hand, value stocks can always rely on the assets owned and weather any economic storm. Over the long term, value lowers risk and that is all that matters in investing, not promises.

How To Improve On Value Investing

Now, Fama and French didn’t look at anything apart from price to book value. However, I firmly believe returns from value investing could be even better if investors avoid sectors where there clearly won’t be more value in the future.

A perfect example is Berkshire Hathaway. Buffet bought the company because it was cheap in the 1960s but eventually closed all the textile operations by the 1980s and as funny as it might sound now, Berkshire was one of Buffett’s worst investments because it cost him more capital than what it returned in time. Nevertheless, the things he bought through Berkshire thankfully made the difference.

So if you manage to avoid declining sectors where much of the book value will end up impaired, I firmly believe that it’s possible to further increase the difference between the returns of a value portfolio and a growth portfolio over a business cycle. The only thing one has to do is apply common sense and buy tangible values that will remain valuable no matter what happens in the economy.

In the today’s market, I would really focus on value in order to find protection from a possible recession and market crash.