What Does Historical Data Reveal About the Performance of Value Stocks Compared to Growth Stocks?

January 19, 2024

Over the course of almost a century, historical data in the US unequivocally reveals the superior performance of value stocks compared to growth stocks. Since 1927, value stocks have consistently outperformed their growth counterparts, boasting an average annual outperformance of 4.4%, as illustrated in Exhibit 1. This enduring trend underscores the reliability of the principle that lower relative prices in value stocks tend to yield higher expected returns. Despite intermittent periods of disappointment, the historical record underscores the enduring significance of this investment principle, with value premiums frequently reaching a substantial 15% in years when value outperforms growth. In essence, the historical data underscores the enduring appeal and efficacy of value investing, emphasizing the enduring nature of the relationship between lower relative prices and higher expected returns. For more comprehensive financial insights, visit our YouTube Channel
**Graph source: Dimensional 2023

Full transcript:

Hello, welcome to Arista Advice! Question of the week is: "Paul, what does historical data reveal about the performance of value stocks compared to growth stocks in the US, and what's the average annual outperformance since 1927?" Well the last couple of years, growth stocks have been on a tear. Ever heard of Apple, Amazon, Microsoft, Facebook? These are companies that are called the wonderful seven, and they've been driving 100% of the growth of the S&P 500 in the last many years.

But there's another secret part of the stock market that Warren Buffett, Bill Gates, and many other individuals and organizations and institutions have been investing in that have really been growing their wealth, and it's called value stocks. But value stocks have been underperforming and have not been delivering the banner news that the wonderful seven have been delivering, But they do well, and they do outperform the market in long-term periods, but you have to be patient.

So let's look at the data between value stocks and growth stocks. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as you'll see on this chart.
Also, historical data strongly favors value stocks in the US, known for their lower relative prices and higher expected returns over the past century.
Third, although there have been occasional disappointing periods, the overall principle of lower relative prices leading to higher expected returns remain valid.
Fourth, value premiums have often been significant , with an average premium of nearly 15% in years when value outperformed growth. Value stocks have low debt, they have nice dividends, they have high book to market, and over time, Wall Street favors those companies instead of growth stocks that borrow and grow and borrow and borrow and borrow and sell ideas. At the end of the day, you have to deliver a product and goods and services and value stocks going back to 1927 have outperformed growth stocks.

But in the short-term, don't get swayed. Always stay focused, always have a plan, always have a prudent withdrawal rate, a prudent contribution rate, and stay invested, and be a long-term investor in a short-term world. Remember, go to AristaWealth.com to get other videos, tools, tips, and resources to help you live a life of significance.