Value vs. Growth

I saw an interesting article today dealing with the longstanding "value vs. growth" argument. Interesting, because it plays the same old stereotypes of "boring" value investors vs. "exciting, risk-taking" growth investors. From the looks of the article, you would think that Warren Buffett and his bretheren got rich buying utilities and textile mills.

"Value investors are bargain-shoppers. They seek out underpriced companies with strong fundamentals that have temporarily fallen out of favor. Value funds tend to be less volatile because they focus more on safety than growth, often investing in more mature companies that pay dividends.

When professional investors talk about growth stocks, they're usually looking for companies with great potential that will give returns in the form of future earnings appreciation. Growth managers are always on the lookout for the next big thing, and often invest in young companies that are rapidly expanding, which makes their funds more volatile. To them, the steady, plodding performance of value stocks seems dull."

The truth is, Mr. Buffett almost got poor buying a textile mill - he only got rich when he used its dying spurts of cash to fund his insurance company, which bought "plodding" no-names like Gillette, American Express and Coca-Cola. Why did he succeed? He waited...and waited...and waited until the price got to where he couldn't not buy them. I'd like to see the guy who goes to Warren Buffett's buddy Bill Ruane's shareholder meetings and tell him that old stodgies like Progressive Insurance and Walgreens are "plodding." He would get laughed out of the room!

The article is still worth something, because it mentions the fact that "value" beats "growth" by 7 percentage points per year in returns. I have no idea who or what the study used for the data source, but I believe it:

"Yet academic research has shown consistently that value investing produces better returns over time — up to 7 percent a year on average, said Lubos Pastor, a finance professor at the University of Chicago Graduate School of Business. This "value premium" seems to support the theories of famous investors like Warren Buffett (news - web sites) and his mentor, Benjamin Graham, but academics are still trying to understand why the strategy has such an edge."

As usual, the academics are now falling all over each other to "explain" (i.e. somehow prove wrong) this mysterious phenomenon. Call me when you find out. I'll be busy counting my money.

Comments

[Stephen Campisi]

"50-cent Dollars" is nicely written and conveys some useful information. Why do you add the comment that "academics are now falling all over each other to explain this mysterious phenomenon" that value beats growth? Or, question where anyone gets the data to support the idea that value beats growth by a healthy margin over the long term? The data for this is easily available, with the longest record provided by Fama & French, going back to 1928. It's available in any Ibbottson book. Even the Russell indexes or the S&P/Barra indexes are easily available (although not going back as far) and support this contention. Still, a nice article.

Has anyone published anything credible challenging the fact that such studies may be flawed because they use passive, buy and hold indexes as the basis for their conclusions? Some contend that the value vs growth debate has different conclusions when you consider active managers instead of indexes. In my opinion, this is a desperate attempt to support growth investing, but it still deserves some credible answer based on facts, rather than conjecture.

Thanks.