(MoneyWatch) Investors seem to be obsessed with investing in growth strategies, whether it’s investing in companies with faster growth of earnings or dividends, or countries with faster rates of economic expansion. They seem to believe that the faster growth must inevitably lead to higher returns. That’s the conventional wisdom. But like so much of conventional wisdom about investing, it’s wrong.
Investing in growth stocks
It’s certainly true that growth stocks (stocks with high price-to-earnings, book-value, sales or cash-flow ratios) have a faster rise in earnings. However, growth stocks have produced lower returns than the stocks of value companies (stocks with low ratios). Using the Fama-French Research Indexes, we see that the faster growing large growth stocks returned 9.3 percent per year for the period 1927-2012, while large value stocks returned 11.6 percent per annum. And the faster growing small growth stocks returned 8.7 percent per year while small value stocks were returning 14.8 percent per year.