Does value investing outperform?

As you know a value investing strategy is implemented when the investor buys shares in companies which he or she believes are undervalued compared to intrinsic value. Intrinsic value meaning what a company´s equity is actually worth, based on the value of discounted future cash-flows to the equity holders. People looking for undervalued stocks tend to use valuation measures such as Price/ Earnings, Price/ Book value, EV/ EBITDA, P/CF..... such measures are utilized to tell the investor something about the current price of the stock versus intrinsic value, and therefore something about future returns. A stock currently priced below it´s intrinsic value should in theory yield a greater return than its peers in the future as its stock price at some point moves upwards in the direction of its intrinsic value.

Yes value stock investing does outperform the broader market systematically according to empirical research based on historical data. This does not necessarily mean that the outperformance will last forever (as this implies that a value investor following a value investment strategy should be able to take over the world at some point, as he eventually would own all outstanding shares in the world due to the everlasting outperformance). Although outperformance has been observed both on a total return basis and a risk adjusted basis (sharpe ratio), some argue that the outperformance is due to a systematic risk factor not picket up by neither standard deviation of returns or the beta risk measure. They argue that the outperformance of value stocks is due to such stocks horrible performance during economic shocks (such as the 2008 financial crisis or the 30s economic crisis), and that this is a systematic factor that should be taken into consideration (i personally keep my self to good old beta for stocks, as the systematic distribution of returns don´t concern me to much as a long-only investor with a time horizon lasting into eternity).

Below I have borrowed a table from the article "Analyzing Valuation measures: A Performance Horse Race over the Past 40 Years" from The Journal of Portfolio Management (Wesley R. Gray and Jack Vogel as main authors). Their results are impressive and strong, proving the significant outperformance of value stocks over growth stocks the last 40 years or so, and that with a healthy alpha too. Although all value measures have their significant merits as shown below, the best overall performer is the EV/ EBITDA measure (or EBITDA/TEV as they call it in the article). A portfolio rebalanced once a year based on finding the 1/5 lowest EV/EBITDA stocks in the market have returned an annual return of 17.66 % over a 40 year period. That´s just plain impressive (not as impressive as Warren Buffet, but close).

Source: The Journal of Portfolio Management

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving any compensation for it.