In 2004 Chan and Lakonishok published Value and Growth Investing: Review and Update. In this study they document annual returns to value and growth investing over the period 1969-2001. They conclude that even after taking into account the hyperbolic surge (and crash afterwards) of growth stocks in the period 1997-2000 value investing still generates superior returns. Over the 1969-2001 Chan and Lakonishok document a compound annual return of 16.4% for large cap US companies, where large caps are defined as stocks ranked in the top six deciles of market cap based on NYSE breakpoints. Over the same period the S&P500 generates a compound annual return of 11.4%.

value stocks

In this contribution we extend the Chan and Lakonishok study:

* we document average annual returns to value and growth investing for large cap US companies over the 1970-2012 period;

* we show the returns to an investment strategy where the value decile is purged from companies with a weak financial position (referred to as value+);

* we compare the returns to value and growth investing with other asset classes such as government bonds, gold and oil, both in nominal and real terms.

-Annual returns

TABLE I and TABLE II show average annual returns for the different investment strategies and asset classes over the 1970-2012 period. Both tables clarify that value+ realizes the highest average annual return. In nominal terms the average annual return to value+ is 16.9%; in real terms the return is 12.5%. Value+ realizes a smaller maximum drop on an annual basis compared to the other investment strategies and asset classes, with the exception of the 10-year Treasury.

TABLE I: AVERAGE ANNUAL RETURNS AND DOWNSIDE RISK (NOMINAL TERMS) OVER THE 1970-2012 PERIOD

Value

Value+

Growth

S&P500

10-year Treasury

Gold

Oil

16.4%

16.9%

11.9%

11.8%

8.4%

11.9%

11.8%

-28.0%

-23.7%

-38.7%

-31.9%

-11.1%

-25.2%

-46.4%

TABLE II: AVERAGE ANNUAL RETURNS AND DOWNSIDE RISK (REAL TERMS) OVER THE 1970-2012 PERIOD

Value

Value+

Growth

S&P500

10-year Treasury

Gold

Oil

12.1%

12.5%

7.6%

7.5%

4.0%

7.5%

7.5%

-26.6%

-22.3%

-45.8%

-30.4%

-13.7%

-34.8%

-48.1%


-Ten-year real total returns

In the following five charts we compare ten-year real total returns between value+ on the one hand and growth, S&P500, 10-year Treasury, gold and oil on the other over the 1980-2012 period. At the bottom of the chart we provide the most important results, more specifically:

* the number of times that each investment strategy or asset class realizes a positive ten-year real total return;

* the average ten-year real total return;

* the minimum ten-year real total return.

Value+ stands out as the best and most consistent investment strategy. We find that in all 33 ten-year periods value+ realizes a positive real total return with an average of 219% and a minimum of 65%. This finding also holds for value. All other investment strategies and asset classes are confronted with at least three ten-year periods of negative real total returns, implying a decrease in real wealth for investors. This is notably the case for gold and oil. Both asset classes suffered from a long period of negative ten-year total returns after the commodity boom in the late 1970s.

GRAPH I: VALUE+ VERSUS GROWTH – TEN-YEAR REAL TOTAL RETURNS

Number of times value+ realizes a positive real total return: 33 out of 33
Number of times growth realizes a positive real total return: 30 out of 33

Average real total return for value+: 219%
Average real total return for growth: 80%

Minimum real total return for value+: 65%
Minimum real total return for growth: -49%

GRAPH II: VALUE+ VERSUS S&P500 – TEN-YEAR REAL TOTAL RETURNS

Number of times value+ realizes a positive real total return: 33 out of 33
Number of times S&P500 realizes a positive real total return: 29 out of 33

Average real total return for value+: 219%
Average real total return for S&P500: 120%

Minimum real total return for value+: 65%
Minimum real total return for S&P500: -33%

GRAPH III: VALUE+ VERSUS 10-YEAR TREASURY – TEN-YEAR REAL TOTAL RETURNS

Number of times value+ realizes a positive real total return: 33 out of 33
Number of times 10-year Treasury realizes a positive real total return: 28 out of 33

Average real total return for value+: 219%
Average real total return for 10-year Treasury: 51%

Minimum real total return for value+: 65%
Minimum real total return for 10-year Treasury: -40%

GRAPH IV: VALUE+ VERSUS GOLD – TEN-YEAR REAL TOTAL RETURNS

Number of times value+ realizes a positive real total return: 33 out of 33
Number of times gold realizes a positive real total return: 15 out of 33

Average real total return for value+: 219%
Average real total return for gold: 67%

Minimum real total return for value+: 65%
Minimum real total return for gold: -60%

GRAPH V: VALUE+ VERSUS OIL – TEN-YEAR REAL TOTAL RETURNS

Number of times value+ realizes a positive real total return: 33 out of 33
Number of times oil realizes a positive real total return: 16 out of 33

Average real total return for value+: 219%
Average real total return for oil: 69%

Minimum real total return for value+: 65%
Minimum real total return for oil: -62%

-Total return

Finally we take a look at the total return of the various investment strategies and asset classes over the 1970-2012 period. The results are shown in GRAPH VI. We start with $1 invested at the end of May 1970. At the bottom of the graph again we show the most important figures. Value+ stands out with a total return in nominal terms of $393.35 after a 43-year period, implying a compound annual return of 14.91%. This figure is somewhat lower compared to the results by Chan and Lakonishok (2004).

GRAPH VI: TOTAL NOMINAL RETURN

Total compound return for value: 324.74
Total compound return for value+: 393.35
Total compound return for growth: 41.10
Total compound return for S&P500: 67.96
Total compound return for 10-year Treasury: 24.66
Total compound return for gold: 43.40
Total compound return for oil: 27.44

Compound annual return for value: 14.40%
Compound annual return for value+: 14.91%
Compound annual return for growth: 9.03%
Compound annual return for S&P500: 10.31%
Compound annual return for 10-year Treasury: 7.74%
Compound annual return for gold: 9.16%
Compound annual return for oil: 8.01%

-Conclusion

In this contribution we compared the returns to value+ investing with other investment strategies and asset classes over the 1970-2012 period. Value+ investing – as originally conceived by Benjamin Graham – proves to be the only investment strategy that realizes a

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