Value Investing Beats Growth Investing
- Alan Lavine and Gail Liberman
Is it better to buy value stocks, which are stocks that are underpriced based on a company's future profits?
Or, should you buy growth stocks, which are stocks of companies growing earnings at least 20 percent annually.
This issue has been an age-old debate.
New research, appearing in the January issue of the Journal of Financial Planning, favors value investing under all economic conditions--but particularly in periods of economic contraction.
Seung-Woog Kwag, Ph.D., a finance professor at Utah State University in Logan, Utah, and Sang Whi Lee, Ph.D., an assistant professor at Kyung Hee University in Seoul, Korea, investigated whether certain economic conditions favor one investing style.
Their article provides a plethora of evidence that value investing generates higher returns than growth investing.
They examined stocks between 1954 and 2002, using four common valuation ratios. They broke stock returns into portfolios, ranging from those with the lowest valuations to those with the highest valuations.
Kwag and Lee then measured the portfolios using three risk measurements aimed at evaluating the portfolios' performance on a risk-adjusted basis. The results varied, depending on which risk measurement was used. But in general, the authors found that "value investing is a more profitable investment strategy than growth investing, even after adjusting for total-, market-, and portfolio-specific risks."
Drawing from National Bureau of Economic Research data, the authors also compared value and growth investing under two economic conditions: Contraction and expansion. They found only one minor exception to their conclusion that on average, investors always benefit from value investing, regardless of economic conditions.
But the benefit, they maintain, is better during a period of economic contraction.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.
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