James O’Shaughnessy in his book ‘What Works on Wall Street’ conducted extensive research on common stocks in the US market.
And the most compelling strategy for delivering attractive long term returns came from value investing.
O’Shaughnessy analyzed a 3,000 stock universe over a period of 52 years.
For each year he identified the 50 most expensive and least expensive stocks by a variety of metrics. He then rebalanced that 50 stock portfolio each year, ensuring that only the most and least expensive stocks were retained.
So if you had bought the 50 ‘growth’ stocks with the highest price / earnings ratio, for example, after 52 years, a portfolio with an initial value of $10,000 would have grown to $793,558.
That sounds like a decent return. Until you compare it with a portfolio comprising the 50 stocks with the lowest price / earnings ratio.
This ‘value’ portfolio, with an initial value of $10,000, would have grown to $8,189,182, over 10x as high.
Now, if you had bought the 50 ‘growth’ stocks with the highest price / book ratio, your initial $10,000 would have compounded, over time, to $267,147.
Stick with me, because here’s where it gets REALLY GOOD:
If you had bought instead the 50 ‘value’ stocks with the lowest price / book ratio, a portfolio with a starting value of $10,000 would have grown to be worth $22,004,691– over 80x as high.