Value vs growth

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Value investing and growth investing are two widely followed investment strategies that have different styles. Each has their own advocates and supporters.


In 1994, academics Josef Lakonishok, Andrei Shleifer, and Robert Vishny published “Contrarian Investment, Extrapolation, and Risk.”[1] Using data from 1968 through 1994, they grouped U.S. stocks into value and growth segments based on price-to-book, price-to-cash flow, and price-to-earnings ratios, as well as sales growth. The researchers concluded that, for a broad range of definitions of “value” and “growth,” value stocks consistently outperformed growth stocks by wide margins. In addition, this outperformance remained robust when the stock samples under review were limited to the larger-capitalization stocks typically favored by large investors.

Since that date, a great deal of academic empirical research has been published on value and growth investing[2].

So why do value strategies beat growth strategies in the long run? It is because human and institutional behaviour cause biases in stock prices that give rise to what is known as the value premium, namely that value stocks beat growth stocks. Individuals are subject to irrational behaviour[3]. They extrapolate, they are overly optimistic, they overreact, they herd. These behaviours create biases in the prices of financial securities as investors overbid them.

James Montier[4] discusses behaviour that leads to specific errors:

Why is it that investors seem drawn to "growth" stories like sailors to the sirens? Psychologists suggest that we have two ways of thinking embedded in our minds. One (the X-system) focuses on emotional decisions, and loves stories. The other (C-system) is far more "Vulcan" like, preferring facts over fantasy. The X-system is the default option, and is likely to be put into action when we are faced by the kinds of decisions we must deal with when investing. This can be related to valuation. Value stocks draw most of their return from the dividend yield. Whereas growth stocks rely on the growth component of returns. So for value stocks we would expect to see biases relating to errors over the sustainability of the dividend. Whereas within the growth universe we would expect to see investors getting carried away with the growth story. Quantitative screens can help mitigate these errors for both value and growth investors. The most important way to beat the bias is to focus on the facts not the stories.

It is possible for a growth stock to become a value stock and vice versa depending on how investors perceive the stock. For example, Microsoft, long seen as a growth stock, exhibited many of the characteristics of a value stock after the dotcom bubble burst.

US performance

The chart below contrasts value vs. growth in US markets. [5]

US - Value vs. Growth.jpg

Canadian performance

The chart below contrasts value vs. growth in Canadian markets. [6]

Canada - Value vs. Growth.jpg

Much of the peak in the Canadian growth performance chart around 2000 is due to the influence of Nortel[7], which is now in bankruptcy.

BlackRock Canada offers two style ETFs, XCV and XCG, which track the Dow Jones Canada Select Value Index and Dow Jones Canada Select Growth Index, respectively, net of expenses.

European performance

The chart below contrasts value vs. growth performance in European markets.[8]

Europe - Value vs. Growth.jpg

World performance

The chart below contrasts value vs. growth performance in world markets.[9]

World - Value vs. Growth.jpg

Further reading


  1. Josef Lakonishok; Andrei Shleifer; Robert W. Vishny, Contrarian Investment, Extrapolation, and Risk, Viewed March 9, 2009.
  2. Chan, Louis K. C. and Lakonishok, Josef, Value and Growth Investing: Review and Update, Viewed October 31, 2011.
  3. Bruce Grantier reviewing James Montier’s book, Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance (November 2008), Viewed March 9, 2009.
  4. James Montier, Dresdner Kleinwort Wasserstein, Understanding behavioural biases from visceral/x-system investing, Viewed October 31, 2011.
  5. MSCI Barra US - Value vs. Growth, Viewed August 26, 2009.
  6. MSCI Barra Canada - Value vs. Growth, Viewed August 26, 2009.
  7. CBC News, Nortel's Icarus-like stock, January 15, 2009.
  8. MSCI Barra Europe - Value vs. Growth, Viewed August 26, 2009.
  9. MSCI Barra World - Value vs. Growth, Viewed August 26, 2009.