In 2015, growth stocks in the United States and around the world outperformed value stocks by one of the widest margins since the global financial crisis. Although value stocks have outperformed growth stocks for extended periods over most of the last 90 years, the decade 2005-2015 has been one of the few ten-year periods in which value has lagged growth.
While Dodge & Cox is a value-oriented investment manager, we understand that there are inevitably periods of time when value is trumped by growth. But we have reasons to believe the current divergence may be destined to narrow and even reverse. In our opinion, these market forces are creating considerable opportunities for value investors. This view is not based on blind faith in a single investment approach nor a conviction that markets must inevitably revert to the mean. Rather, it grows out of a deep understanding of the ways in which markets have historically responded to fundamental value.
We believe having patience and persistence and retaining a long-term investment horizon are essential to long-term investment success. Hence, we encourage our shareholders and clients to take a similar long-term view of investing.
One of the enduring debates in equity investing has been between those investors who emphasize value and those who emphasize growth. For analytical purposes, the entire equity market can be divided into growth and value stocks based on such attributes as price-to-book (P/B) and price-to-earnings (P/E) ratios. Generally, stocks that have higher valuations are considered “growth” stocks, while those with lower valuations are “value” stocks.
Over the years, the relative performance of growth and value has seesawed, but value strategies have nearly always outperformed over horizons of a decade or more. In fact, there have only been three times over the past 90 years when value has underperformed for a ten-year period in the United States: the Great Depression (1929-1939/40), the “Technology Stock Bubble” (1989-1999), and today (2004-2014/15).(a)
The general outperformance of value stocks has been reaffirmed in a variety of studies.
