When It’s Value vs. Growth, History Is on Value’s Side
Logic and history argue for a steadfast commitment to value stocks
Historically, value stocks have outperformed growth stocks in the US, often by a striking amount. Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns.
While disappointing periods emerge from time to time, the principle that lower relative prices lead to higher expected returns remains the same. Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.
EXHIBIT 1
Value Add
Yearly observations of premiums: value minus growth in US markets, 1927–2022
A consistent focus on value stocks is essential to capturing these outsize value premiums when they appear. Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return. That’s one of the most fundamental tenets of investing. Logic and history support a commitment to value stocks so investors can be positioned to take part when those shares outperform in the future.
GLOSSARY
Value stock: A stock trading at a low price relative to a measure of fundamental value such as book equity.
Growth stock: A stock trading at a high price relative to a measure of fundamental value such as book equity.
Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
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