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Value stocks --
enels
06-26-2007, 5:33 PM | Post #2404881
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I hope no one read my post and assumed I was implying that HmL was guaranteed to be 4% over some period, or that HmL is never negative. (I certainly wasn't, any more than MKT or SmB is expected to achieve a certain premium, or any premium)
How 'bout I ammend my post above with the following data mined examples of poor HmL periods:
Annualized 5YR Returns
........1937-1941...1956-1960...1987-1991....1995-1999
MKT......(6.6).......+7.2........+6.9.........+20.7
SmB......+0.2........+1.7........(3.6).........(4.3)
HmL......(2.2).......(1.4).......(3.8).........(5.7)
So, clearly, there have been very uncomfortable periods where investors have not been rewarded for the added risk of buying value stocks vs. growth stocks.
Of course, I also should point out that, historically, even with "bad timing", patience has been rewarded.
...extending the poor 5YR HmL periods to 10YRs:
Annualized 10YR Returns
........1937-1946...1956-1965...1987-1996....1995-2004
MKT......+5.1.........+8.3........+6.9.........+5.5
SmB......+5.7.........+1.1........+0.6.........+2.4
HmL......+5.8.........+3.7........+3.5.........+4.7
Now, if you want to see something really interesting...calculate the 10 year annualized MKT, HmL, and SmB premiums that I just outlined above (note the original 5YR periods were intentionally chosen because they were the only negative 5YR HmL periods I could find excluding the Great Depression -- after the fact I went back and calculated the 10YR result to see how damanging bad HmL timing would be). If you don't wanna do it...here is the chart:
Bad HmL Timing vs No HmL Timing
..........Ave of 4 Periods*...Ave of ALL 10YR Periods
MKT..........+6.5%...............+6.8%
SmB..........+2.5%...............+2.4%
HmL..........+4.4%...............+4.5%
* = ave of 1937-1946, 1956-1965, 1987-1996, 1995-2004
Ave of ALL 10 YR Periods = average annualized 10 YR returns for EVERY PERIOD from 1927-2006
So, as much as we may concern ourselves with what return value stocks may deliver relative to growth stocks in the near future....they are still value stocks, with lower valuations and thus higher expected returns.
And, if history is any guide, it doesn't really matter when you invest in value stocks. If you wait long enough, chances are the market will reward you for the risk with about the same returns as everyone else gets...
And, as Robert metioned above, the last 80 years seems to at least give us a reasonable approximation of what to expect going forward.
as a side note, see the recent Fama/French effort Average Returns, B/M, and Share Issues for a review of B/M's ability to estimate future expected returns.
eric
Originally posted in thread: 59459
Topics
chart
Gene Fama
market
returns
stocks
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