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Value Lives

Value style carries its own risks

That's the theory, and in the long run value investing has had higher returns than growth by a wide margin without additional risk as measured by volatility. But, the value premium has its own price, as we would expect in a world without free lunches. Value stocks may go for long periods during which they underperform growth as we have just seen.

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Given the cyclical nature of all investing styles, it was inevitable that value would return. But, the timing couldn't be forecast. And it would be a mistake to forecast that value will continue to dominate. It might or might not. Short-term predictions are pointless in an atmosphere of uncertainty and randomness.

What we should learn from this is that a disciplined diversified portfolio with a value tilt still makes sense. During the 90′s value dry spell, value investors made money when growth stocks soared. Not as much, but they kept it all when growth stocks tanked.

Summary

Over the long haul, value investing has been a far superior style than growth. Discipline and diversification are the two keys to long-term success. After all, investing is a marathon, not a sprint. Those stories remain intact.

*Source: Standard & Poor's

Index Definitions:

S&P 500 Index: The 500 stocks in this capitalization-weighted index are chosen by financial information firm Standard and Poor's based on industry representation, liquidity, and stability. The S&P 500 is not composed of the 500 largest companies but rather is designed to capture the returns of many different sectors of the US economy. The index is composed of roughly 400 industrial, 40 utility, 40 financial, and 20 transportation stocks.

The S&P/BARRA Large Cap Growth Index is the growth (as opposed to value) portion of the S&P 500 Index. The result of collaboration between financial information firms Standard & Poor's and Barra, Inc., this capitalization index tracks the half of the S&P 500 stocks with the highest ratio between book value and stock price, or book-to-price ratio.

The S&P/BARRA Large Cap Value Index, like its twin, is constructed by dividing the stocks in the S&P 500 index according to book-to-price ratio. In this capitalization-weighted index firms have higher bookto- price ratios and therefore belong to the value half of the index.

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