What's the more lucrative investment strategy? Investing for growth or investing for value?
While the battle rages on, a new Bank of America Merrill Lynch report has declared that value is winning the war.
“Since 1926 the average annual price return of Value stocks is 17.0% versus 12.8% for Growth stocks," BAML's Michael Hartnett wrote. "Value has outperformed Growth in roughly 3 out of every 5 years over this period."
The two strategies themselves have been the most popular basic investment strategies for decades. In many ways they are complete opposites, with growth investors looking for stocks with higher than average earnings growth rates and value investors looking for stocks they consider undervalued or cheap relative to the market. Often, these value stocks have below average earnings growth rates.
Bank of America further linked value stock outperformance with “periods of economic expansion,” while “growth tends to outperforms during periods of depression, recession and below-trend growth.” Essentially, value stocks do better when the economy is growing. This helps explain their long-term outperformance, as the economy does tend to grow in the long-run.
However, a notable exception to this trend has taken place over the last seven years. The economy has been growing, but growth stocks have been performing better than value stocks. It is important to note the most recent recovery has been affected by abnormal factors though - interest rates and inflation have been at historic lows for these past few years, leading to increased demand for growth. Oil has also been hit hard over the past couple of years, and oil stocks often fall into the value category.
Rayhanul Ibrahim is a reporting intern at Yahoo Finance.