Value Investing Style Provides Highest Long Term Returns
Key Investment Principle #1
Value Style Investing is a method of selecting stocks that have low price to book, price to earnings, price to sales, and debt to equity ratios. Value stocks are primarily purchased because they are selling at below their intrinsic value with the hope that the stock price will eventually rise to its higher intrinsic value. This is in contrast to Growth Style Investing where stocks are purchased because they are experiencing high earnings and sales growth and are expected to continue producing this high growth. Unfortunately, history has shown that many Growth Style stocks simply can not keep up their high growth over long periods of time and usually have inflated stock prices when the Growth Style investor buys in.
- Margin of safety provided by value stocks allows the investor to buy at a price lower than intrinsic market value.
- Private equity activity is a major catalyst for unlocking intrinsic value.
- Value investing does not rely on a greater fool to come along to buy at an overvalued price.
- Volatility tends to be on the upside instead of the downside.
Click to view: Average Returns of Various Stock Market Sectors
Click to view: 10 Year Historical Annualized Net Returns (%) as of Feb 14, 2007 (U.S. Dollar Terms)
Sources: All data are in U.S. Dollars. Performance does not reflect expenses associated with management of an actual portfolio. Data from Fama/French, and MSCI Barra database. All rights reserved.