How can "value beats growth" be a rule?

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kidfresh
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How can "value beats growth" be a rule?

Post by kidfresh »

Good morning,

I'm reading "The Four Pillars of Investing". Bernstein talks about the long-term risk difference in value stocks compared to growth stocks and I get the idea in theory - value stocks are "dogs" with higher risk but higher upside potential, while growth stocks are "cash cows" with safe, predictable performance and accordingly lower upside potential.

However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?

Doesn't the hypothetical value premium evaporate once "value beats growth" becomes the conventional wisdom? Or does the greater risk inherent in value stocks effectively kick out the timid investor over time and leave that premium intact over the long-haul?

Thanks for any and all responses.
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whaleknives
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Re: How can "value beats growth" be a rule?

Post by whaleknives »

Did you see "A Chance for a Market’s Wallflowers to Bloom" in yesterday's New York Times?
  • "Why would such an anomaly persist? Professor Greenwald points to what is known as the “lottery preference.” People 'will always overpay to try to get rich quick.' "
The article, which quotes Fama & French, suggests the value payback is long term with plenty of room for behavioral economics.
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steve_14
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Re: How can "value beats growth" be a rule?

Post by steve_14 »

I believe, in later years, that that's exactly what Dr. Bernstein said people did - that there was no longer a value premium. Note that his newer books recommend total market portfolios. He's a regular poster here, so perhaps he'll respond (or you can PM him).
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nisiprius
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Re: How can "value beats growth" be a rule?

Post by nisiprius »

It's not a truism. Burton Malkiel--not that he's always right, just that these things are never as cut-and-dried as advocates say--brushes aside "The Value Will Win record" in one page in a chapter called "Potshots at the Efficient Market Theory and Why They Miss."
whaleknives wrote:Did you see "A Chance for a Market’s Wallflowers to Bloom" in yesterday's New York Times?
  • "Why would such an anomaly persist? Professor Greenwald points to what is known as the “lottery preference.” People 'will always overpay to try to get rich quick.' "
The article, which quotes Fama & French, suggests the value payback is long term with plenty of room for behavioral economics.
Why do people assume that the "lottery preference" is somehow objectively wrong and that people are "overpaying" for it? Why can't it be a perfectly valid preference for the kind of risk they wish to take? I am not interested in getting rich quick, but give me a knowing choice between "lottery ticket" pattern (high chance of small underperformance, low chance of hitting a big jackpot) versus "martingale gambling system pattern" (high chance of small outperformance, rare chance of catastrophic loss) I'll go for the lottery ticket skew any day and refuse to call it irrational. It's just a rational reflection of my utility function.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
larryswedroe
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Re: How can "value beats growth" be a rule?

Post by larryswedroe »

First, value should always be expected to beat growth, it's simple cost of capital story. Even if people crowd into the trade the result should only be a shrinking not disappearance of the premium, because it's RELATIVE, top 30% of stocks are growth and bottom are value. The wider the spread in relative ratios of say p/b or p/e the larger the premium has been and vice versa. So a crowding into the trade would narrow the premium by narrowing the spreads. Note that around the world the value premium has been large and persistent virtually everywhere, and not just in stocks, but currencies and commodities as well

Second, I can't speak for Bill but I've virtually certain he believes in the value premium and similarly invests that way himself and for clients---but he also knows I believe that many who don't understand finance might not live with the tracking error and potentially long periods of underperformance---and discipline is more important than allocation. Hence the market like portfolios being recommended.

Hope that is helpful
Larry
kenner
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Re: How can "value beats growth" be a rule?

Post by kenner »

Seems that ultimately (sometimes over decades) financial reward for investors is dependent on their willingness to take financial risk. Some undervalued stocks are undervalued for a valid reason. Some of them eventually have stock prices that go to zero. Check out the full history of Enron, once one of the highest price performing stocks in America.

On the other hand, check out the investment history of Michael Price at Mutual Series Shares. He is one of the great examples of successful investing in undervalued stocks, including the stocks of companies that had filed for banruptcy protection. It has to be a tough business. As I understand it, after he achieved fame in the mutual fund world, he quit his mutual fund gig and started his own private investment company.

P. S. Just read on Wikipedia that Price's investment style is almost identical to the investment style of legends Warren Buffet and Ben Graham.
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Re: How can "value beats growth" be a rule?

Post by Random Walker »

Kid fresh,
I once had the same dilemma/question as you, then Larry straightened me out. The market doesn't equilibrate returns by adjusting prices. The market prices risk.

Dave
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Re: How can "value beats growth" be a rule?

Post by larryswedroe »

Nisiprius
Your point is exactly what Fama and French wrote in their paper and have been describing---it's a preference, one that is "irrational" from a logical man perspective so it's an anomaly for the EMH which assumes people act rationally--which is why the EMH is just a model and not a law.
My own view is that most people have no clue they are buying lottery tickets with low expected returns, they don't know the data in all likelihood.
Larry
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matjen
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Re: How can "value beats growth" be a rule?

Post by matjen »

steve_14 wrote:I believe, in later years, that that's exactly what Dr. Bernstein said people did - that there was no longer a value premium. Note that his newer books recommend total market portfolios. He's a regular poster here, so perhaps he'll respond (or you can PM him).
This is wrong. Although I welcome any corrections from Dr. Bernstein himself, what Larry wrote in the thread later is correct. "Second, I can't speak for Bill but I've virtually certain he believes in the value premium and similarly invests that way himself and for clients---but he also knows I believe that many who don't understand finance might not live with the tracking error and potentially long periods of underperformance---and discipline is more important than allocation. Hence the market like portfolios being recommended."

Steve you just can't take what Bill wrote in a 99 cent ebook aimed at 22 year old beginners and claim that there isn't a value premium. Even those that strongly believe in it wouldn't argue with the adequacy of a 3 fund portfolio or LifeStrategy for the vast number of investors. Here is what Dr. Bernstein wrote in a a related thread yesterday:

"No, I haven't changed. As so many are fond of pointing out on this forum, there's more than one road to Jerusalem.

I've come to the conclusion that the best solution for 95% of savers is a Target Retirement fund (which I mention in the booklet), but that doesn't allow for an adequate discussion of the basics of finance, so I went with the three-fund instead.

For the one percent who can put together, maintain, and most importantly, stick with a complex, tilted, slice-and-dice portfolio, I think there's *probably* a small advantage going forward.

But I wouldn't be the farm on that either.

Bill"
A man is rich in proportion to the number of things he can afford to let alone.
kenner
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Re: How can "value beats growth" be a rule?

Post by kenner »

Seems to me that any investment portfolio that ignores significant tax consequences to the investor is less than ideal.
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tadamsmar
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Re: How can "value beats growth" be a rule?

Post by tadamsmar »

kidfresh wrote:Good morning,

I'm reading "The Four Pillars of Investing". Bernstein talks about the long-term risk difference in value stocks compared to growth stocks and I get the idea in theory - value stocks are "dogs" with higher risk but higher upside potential, while growth stocks are "cash cows" with safe, predictable performance and accordingly lower upside potential.

However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?

Doesn't the hypothetical value premium evaporate once "value beats growth" becomes the conventional wisdom? Or does the greater risk inherent in value stocks effectively kick out the timid investor over time and leave that premium intact over the long-haul?

Thanks for any and all responses.
Perhaps it just influences the investor who properly discounts the return because the risk is higher, perhaps the market is just getting the risk-return math right.
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Re: How can "value beats growth" be a rule?

Post by 3CT_Paddler »

larryswedroe wrote:Note that around the world the value premium has been large and persistent virtually everywhere, and not just in stocks, but currencies and commodities as well.
There are a couple notable exceptions in Europe... the UK being one of them.
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kidfresh
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Re: How can "value beats growth" be a rule?

Post by kidfresh »

kenner wrote:Seems to me that any investment portfolio that ignores significant tax consequences to the investor is less than ideal.
I think I missed something. How is this pertinent?
avalpert
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Re: How can "value beats growth" be a rule?

Post by avalpert »

kidfresh wrote:Good morning,

I'm reading "The Four Pillars of Investing". Bernstein talks about the long-term risk difference in value stocks compared to growth stocks and I get the idea in theory - value stocks are "dogs" with higher risk but higher upside potential, while growth stocks are "cash cows" with safe, predictable performance and accordingly lower upside potential.

However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?

Doesn't the hypothetical value premium evaporate once "value beats growth" becomes the conventional wisdom? Or does the greater risk inherent in value stocks effectively kick out the timid investor over time and leave that premium intact over the long-haul?

Thanks for any and all responses.
Replace the word 'value' with 'equity' and 'growth' with 'fixed income' - do you have the same questions? If not, why not?
NOLA
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Re: How can "value beats growth" be a rule?

Post by NOLA »

kidfresh wrote:
kenner wrote:Seems to me that any investment portfolio that ignores significant tax consequences to the investor is less than ideal.
I think I missed something. How is this pertinent?
Stocks in taxable & bonds in tax-advantage accounts I assume? Even though a target retirement fund might be best for most people, it might be a little tricky if the investor does not have a lot of tax-advantage accounts.
steve_14
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Re: How can "value beats growth" be a rule?

Post by steve_14 »

matjen wrote:Steve you just can't take what Bill wrote in a 99 cent ebook aimed at 22 year old beginners and claim that there isn't a value premium.
Not true at all. Bernstein's last book, "An Investor's Manifesto", covered some advanced topics and recommended a three fund portfolio. The paperback is $17.
matjen wrote:
"No, I haven't changed. As so many are fond of pointing out on this forum, there's more than one road to Jerusalem.

I've come to the conclusion that the best solution for 95% of savers is a Target Retirement fund (which I mention in the booklet), but that doesn't allow for an adequate discussion of the basics of finance, so I went with the three-fund instead.

For the one percent who can put together, maintain, and most importantly, stick with a complex, tilted, slice-and-dice portfolio, I think there's *probably* a small advantage going forward.

But I wouldn't be the farm on that either.

Bill"
That sounds about right - 3 fund is right for most people, a SD portfolio might or might not work. Note that this is the exact opposite of Larry's opinion, who says that the value premium is as reliable and persistent as the equity risk premium, which shows up 90% of the time over 10 year periods!
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Re: How can "value beats growth" be a rule?

Post by steve_14 »

avalpert wrote:
kidfresh wrote:Good morning,

I'm reading "The Four Pillars of Investing". Bernstein talks about the long-term risk difference in value stocks compared to growth stocks and I get the idea in theory - value stocks are "dogs" with higher risk but higher upside potential, while growth stocks are "cash cows" with safe, predictable performance and accordingly lower upside potential.

However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?

Doesn't the hypothetical value premium evaporate once "value beats growth" becomes the conventional wisdom? Or does the greater risk inherent in value stocks effectively kick out the timid investor over time and leave that premium intact over the long-haul?

Thanks for any and all responses.
Replace the word 'value' with 'equity' and 'growth' with 'fixed income' - do you have the same questions? If not, why not?
Risk (15 year volatility) according to Morningstar:

Vanguard total bond market: 3.52
Vanguard small cap value: 19.29
Vanguard small cap growth: 21.13

Just a friendly reminder for anyone equating "value and growth" with "fixed income and equity" risk. Don't leave common sense at the door when thinking about this stuff.
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matjen
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Re: How can "value beats growth" be a rule?

Post by matjen »

steve_14 wrote:
matjen wrote:Steve you just can't take what Bill wrote in a 99 cent ebook aimed at 22 year old beginners and claim that there isn't a value premium.
Not true at all. Bernstein's last book, "An Investor's Manifesto", covered some advanced topics and recommended a three fund portfolio. The paperback is $17.
matjen wrote:
"No, I haven't changed. As so many are fond of pointing out on this forum, there's more than one road to Jerusalem.

I've come to the conclusion that the best solution for 95% of savers is a Target Retirement fund (which I mention in the booklet), but that doesn't allow for an adequate discussion of the basics of finance, so I went with the three-fund instead.

For the one percent who can put together, maintain, and most importantly, stick with a complex, tilted, slice-and-dice portfolio, I think there's *probably* a small advantage going forward.

But I wouldn't be the farm on that either.

Bill"
That sounds about right - 3 fund is right for most people, a SD portfolio might or might not work. Note that this is the exact opposite of Larry's opinion, who says that the value premium is as reliable and persistent as the equity risk premium, which shows up 90% of the time over 10 year periods!
OK, his two most simplistic books. You got me! ;-)
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Re: How can "value beats growth" be a rule?

Post by Call_Me_Op »

kidfresh wrote: However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?
Stocks historically have much higher returns compared to bonds. Why doesn't everyone just plow all of their money into stocks? Answer is the same.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: How can "value beats growth" be a rule?

Post by larryswedroe »

FWIW
Here's the long term returns and SD data since 1926
LG 9.5/18.7
LV 10.6/26

So no question value stocks had both higher returns and higher SD--using SD as measure of risk value stocks clearly much riskier (and by market cap large value is much higher percentage of total value stocks than small caps, which are only about 2% of TSM).

SG 9.2/28
SV 13.8/29.8

So even here we find high SD though not much higher, but huge difference in returns---the value premium much larger in small than large

So for those that want to say that value isn't riskier, at least using SD and the longest data we have value is riskier in both small and large

Larry
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kidfresh
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Re: How can "value beats growth" be a rule?

Post by kidfresh »

avalpert wrote:
kidfresh wrote:Good morning,

I'm reading "The Four Pillars of Investing". Bernstein talks about the long-term risk difference in value stocks compared to growth stocks and I get the idea in theory - value stocks are "dogs" with higher risk but higher upside potential, while growth stocks are "cash cows" with safe, predictable performance and accordingly lower upside potential.

However, if that's so obvious, such a truism, then why doesn't everyone just plow their money into value stocks, drive up prices and down returns, and then discover that growth stocks are the newly crowned underdogs of the market?

Doesn't the hypothetical value premium evaporate once "value beats growth" becomes the conventional wisdom? Or does the greater risk inherent in value stocks effectively kick out the timid investor over time and leave that premium intact over the long-haul?

Thanks for any and all responses.
Replace the word 'value' with 'equity' and 'growth' with 'fixed income' - do you have the same questions? If not, why not?
That's a great way of framing it. Thank you!
kenner
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Re: How can "value beats growth" be a rule?

Post by kenner »

kidfresh wrote:
kenner wrote:Seems to me that any investment portfolio that ignores significant tax consequences to the investor is less than ideal.
I think I missed something. How is this pertinent?
One of the posts seemed to indicate a recommendation for Target Retirement/ Life Strategy funds. Because some of those funds contain a large percentage of taxable bonds, in taxable accounts that can be very tax-inefficient, causing measurable, unnecessary losses in long term returns.

I, too, like them for tax-advantaged accounts.
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