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3 Reasons why Value outperform over the long term

July 17, 2023
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Below I list three reasons why value stocks have consistently outperform growth stock over the long term.

1. Mean Reversion 

One of the strongest phenomena in the stock market is mean reversion. Highly profitable companies tend to become less profitable over time while heavily distressed companies have profitability improvements. 

The biggest reason for this is competition. In favour highly profitable industries attract competition while out of favour industries result in companies exiting the industry. 

Below is a comprehensive study on mean reversion:

Death, Taxes and Reversion to the Mean https://seekingalpha.com/article/57615-death-taxes-and-reversion-to-the-mean?source=Drive

2. Trend Extrapolation

Investors extrapolate trends which results in investors thinking high growth stocks will continue to grow at high rates while unprofitable companies will continue to be loss making entities. The truth is generally somewhere in the middle.

Further Evidence on Investor Overreaction and Stock Market Seasonality
https://greenbackd.com/2009/04/03/tweedy-browne-updates-what-has-worked-in-investing/

3. Forced Action / Takeover 

Another reason why value companies perform well over the long term is because they are cheap! Sophisticated investors know these companies are cheap and are willing to buy the company outright. This means that a lot value companies are takeover candidates. 

Buying a company outright or acquiring a company usually comes at a price or premium. So when another company offers to buy a cheap public company, they need to make an offer that is usually higher than the current market price.

https://greenbackd.com/2009/03/18/entrepreneurial-shareholder-activism-hedge-funds-and-other-private-investors/

https://greenbackd.com/2009/04/24/hedge-fund-activism-corporate-governance-and-firm-performance/

https://greenbackd.com/2009/01/16/ramius-capitals-white-paper-the-case-for-activist-strategies/


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