Abstract
A great deal of academic research provides solid evidence that value investing generated better returns than growth investing from the early 1970s to the mid-1990s. However, the relatively poor performance of value stocks in the late 1990s generated suspicion that value investing was failing. Such claims were invalidated by empirical research showing that value stocks’ slump in this period was not caused by a change in fundamental patterns, but rather by investors’ overly-rosy expectations for new technology companies.
Highlights
The foundation of value investing dates back to [1] in which Graham and Dodd argued that securities should be purchased if their market price is less than their intrinsic value
Basu [2] showed that stocks with low price-to-earnings ratios (P/E) tend to have higher subsequent average returns than stocks with high P/E
Various studies provided evidence that value stocks could generate superior return than growth stocks. This spread is often more significant in the small-cap stocks than in the large-cap stocks, indicating that part of the spread must be attributed to size of the companies
Summary
The foundation of value investing dates back to [1] in which Graham and Dodd argued that securities should be purchased if their market price is less than their intrinsic value Since this trading strategy has received much attention from investors and academics alike. Basu [2] showed that stocks with low price-to-earnings ratios (P/E) tend to have higher subsequent average returns than stocks with high P/E. They called this return “the value premium”. Fama and French [6] further confirmed that value stocks outperformed growth stocks in all major financial markets This academic work has had a tremendous impact on the investment industry. Show that even if we include the late-1990s stocks’ performance, value investing had still generated superior returns
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