Where’s the Value? The Historical Long-Term Trend of Positive Value Premiums

When the topic of long-term investing comes up, a diversified portfolio is top on the list of discussion points. A balanced portfolio includes both value and growth stocks with a mix of large-cap and small-cap funds. Historically, value stocks out-perform growth stocks over extended time frames. Currently, we are in a period of under-performance for value stocks with 7 out of the last 10 years presenting a negative value premium. While this may seem alarming to investors it is not unusual and if we take a look back at the historical trends of 5 and 10 year periods the numbers will speak for themselves on the benefits of staying the course with value stocks.

The Difference Between Value and Growth Stocks

Buying anything of value is defined as a less expensive option of purchase. The same goes for purchasing stocks. A value stock typically has a lower price-to-earnings ratio and pays dividends to investors. This means the stock in relation to the company’s earnings per share is lower in cost. These stocks grow in value when the overall market recognizes the potential they present. Distressed companies are often considered a value stock.

On the other side of the spectrum are growth stocks with higher price-to-earning ratios. These stocks may seem overpriced or overvalued at times but investors expect the general earnings of the company to continue an upward trend of growth at above average rates relative to the general market at the time. Growth companies tend to reinvest their earnings back into the company instead of distributing dividend payments to investors. Technology companies often times fall in the growth category.

Performance Comparison in Rolling 5 and 10 Year Periods

As an investor, it is necessary to evaluate the growth rate of stocks over extended time frames. Stock performance is typically analyzed in rolling time frames which gives a better overall view of performance since there is so much short-term variability in stock performance. Rolling 5 and 10 year time frames are commonly used to compare value and growth premiums. In a study from July of 1926 to December 2017, value premiums out performed growth premiums 75% of the time in 5 year periods and this number jumps to 84% of the time in rolling 10 year periods.

Staying the Course in Your Investment Strategy

We understand that it can be unsettling for investors to see negative value premiums over an extended period of time but they are still a sound investment strategy. Historically, value stocks perform well over longer time periods more often than not (See Historical Observations Chart). There is great benefit for the long-term investor in a balanced portfolio that includes value stocks. With both value and growth stocks there may be volatility in the short-term but the historical trend is roughly a 12.5% value premium and 10.5% growth premium over time. Our investment strategy is to stay the course with value stocks and in time the value premium will rebound.