value vs growth

has anyone here backtested value vs growth strategies?

if so:

what time frame did you use?

what indices did you use?

what was the value premium, if any?

By my math (using the Russell 3000 as of qtr end), growth has outperformed value over the 1, 3, 5 and 10 year periods by 6.8%, 1.0%, 2.3%, and 2.1%, respectively.

And using the MSCI ACWI growth has outperformed valued over the same periods by 6.4%, 1.5%, 1.5%, and 1.0%, respectively.

Obviously take it with a grain of salt, given 10-years isn’t all that long of a horizon…

Fama-French 3 factor model looks at high vs low book to market as one of it’s factors to look at value vs growth.

For some reason, I can’t paste in a link on this computer but French has some data on his website.

Yes. That Fama/French data is without doubt the most authoritative on this area. Historically, small cap value stocks have been massive outperformers in the long term. Growth can outperform for relatively long periods mind such as the late 90s.

Value is generally defined here as being low P/B. As a result, a value screen can be harsh on companies with low capex, especially the tech sector. Since they have low capex, ROIC in such firms will tend to be high and hence so will P/B.

You just killed a DFA advisor.

Go to google finance and compare the IWN to the IWO as far back as it will go. That’s really all you need to know about that.

The value is about 2.5x the growth index since 1980 based on R2K data. Counter intuitively, the R2K growth has actually underperformed the S&P by a wide margin as well. I believe S&P is about 2x the R2K growth over the last 35 years. This doesn’t seem possible until you realize that a lot of “growth” companies are just scammy BS turd stocks that get lumped into growth because they are not value and have to be categorized in one or the other.

Right now the small cap market is a steamy pile of dooter. Just ridiculous levels of BS. I am literally short multiple stocks where the company has <5 employees, no products or outlook, and are being valued at $200-500 million of cap. Several of these are run out of strip malls, literally!

Growth has absolutely wrecked value in the face over the last couple of years. Until the last couple of weeks, R2K growth had something like an 18% spread against value over the last 12 months (it’s currently about 13.5%). This cannot continue indefinitely. The market is way out of line right now. About 25-30% of R2K growth is healthcare, and a good portion of that is biotech. At least 1/3rd of the R2K biotech stocks are set to decline 80%+ in coming years IMO.

It’s impossible to say when but we’re close to a 1999 / 2007 type of bear market for value. The market craps its pants hard when growth gets this out of line. When the reversion comes, it will be brutal for people long speculative stocks and value will likely have a 2-3 bull market similar to 2001-2003. There are some really high quality value producing assets trading at near 2009 levels right now with no solvency risk (wtf), particularly in the industrials market with peripheral energy exposure. The wildcard is the Fed and how much longer they are going to support this nonsense.

thanks Bro for the write up. i agree on the biotech crash, not sure if it will be this year but soon enough

I think it’s happening now. It’s hard to say if this is just a blip or the start of a trend. If you look at the IPO market though, a lot of low quality deals have failed recently. We are about 3 years into the nonsense and closer to the end than the beginning. It could probably go another year if the Fed allows it to but that’s about it. I’m short about 20 biotech stocks with low rebates and will get paid eventually on probably all of them, but certainly at least 80%.

In any case the market can afford to be irrational longer than I can afford to be short. Some of the valuations in biotech are nuts for sure

I haven’t looked at this in a while, but I recall Damodaran pointing out that Value benchmarks tend to outperform Growth benchmarks, but that growth managers tend to outperform their benchmarks by more than the value managers do.

It always struck me that this meant that a sensible strategy is to do growth bets in a pairs strategy or market neutral way, then port the alpha onto a value benchmark to get the best of both worlds.

My short book is built to survive. The entire set could literally double overnight and I would still be in business.

It’s not about getting rich. The short book is like life insurance underwriting. You underwrite a population that is likely to survive to maturity and be healthy. On the short book, it’s the opposite, you underwrite those that have no future and are set to die horrible deaths. You get paid on the whole basket over time, so you are being paid to take out insurance if it’s done properly. Long book is where most of the long-term gains are though, you just want to avoid getting wiped out in the case of a market collapse.

Growth stocks are more volatile in general and allow a lot more of an opportunity for good traders to trade around the names. Value stocks often do nothing until they go. I own some HSON with a low $2s cost basis. It did nothing, and then was up 50% in 2 days on no news. There was no trading opportunity there. Compare to DDD or any other volatile growth stock.

I work at Russell Indexes (now it is called FTSE Russell), shoot me a private msg and I can send you a research that our team worked on. I’ve seen this kind of research sent to clients.