Value Investing Outperformed Growth Over Past 35 Years: Goldman

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A combination of overconfidence, cognitive biases, and intense competition means that most active stock pickers underperform the market, usually by a fair margin. But research from Goldman Sachs analysts Stuart Kaiser, David J. Kostin, Amanda Sneider, and Ben Snider shows that a focus on growth stocks instead of value investing is also an important factor.

Value investing strategies ‘consistently generated strong returns’

“Focusing on trailing EPS growth does produce modestly positive annualized returns of 120 bp and incorporating growth cycles incrementally improves performance,” they write in a June 16 report. “By contrast, passive stock-picking based on Valuation has consistently generated strong returns over the past 35 years.”

Their report glides past this fact and constructs a series of filters that are supposed to help drive earnings on a sector-by-sector basis, but it’s hard not to feel like the overcomplicated approach is an exercise in curve-fitting. With enough variables, you would expect some combinations of them to have outperformed the market, but that doesn’t mean they should form the basis of your investment strategy in the future.

This becomes even more important as ETFs proliferate and investors have to choose which style of passive value investing is most attractive. While it might be true that talented stock pickers can beat the market, passively managed ETFs eliminate even the hope of outperforming with tactical trades. In that context, working through a combination of sector, cycle phase and indicators, and correlated growth metrics to screen stocks isn’t possible. The obvious solution then is to stick with value-oriented ETFs and enjoy your returns.

Passive value investing: Forward EPS adds little value to stock picking: Goldman

One thing that is striking in the comparison of growth metrics, and actually feeds back into the argument that investors should focus on value, is that the only one to do particularly well is trailing EPS.

EPS produces positive Growth returns

“Across the S&P 500 trailing EPS is the only growth metric with positive returns since 1980,” write Kaiser et al. “At the sector level trailing earnings and revenue are the only metrics with consistent positive returns. Forward earnings forecasts add little value to growth stock-picking.”

Value investors have a strong preference for trailing PE (or CAPE) over forward PE simply because it gives you an objective way to compare stocks. Forward PE has all kinds of assumptions built in that may not be obvious, so it’s not surprising that it doesn’t much help in the long run.

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