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Growth vs. Value, 1937-1997
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Excerpted from Common Sense on Mutual Funds by John C. Bogle, page 231
We begin with growth stocks (generally, those with above-average earnings growth, price-earnings ratios, and market-book ratios) and value stocks (lower in each case, and offering above-average yields). For this study, I've examined 60 years of growth funds (mutual funds with stated growth objectives and a record of above-average volatility) and value funds (seeking both growth and income, and demonstrating average to below-average volatility). In recent years, the conventional wisdom has been to give the value philosophy accolades for superiority over the growth philosophy. Perhaps this belief predominates because so few observers have examined the full historical record. Nonetheless, over the long run, as shown in Figure 10.3, RTM (reversion to the mean) proves powerful and profound. In the early years, growth funds controlled the game and were clearly the winners from 1937 through 1968. At the end of that long era, an investment in value stocks was worth just 62 percent of an equivalent initial investment in growth stocks. Value stocks then enjoyed a huge resurgence through 1976, redressing almost precisely the entire earlier deficit. (This recent history - covering only 8 of the entire 60 years - has created the value stock mystique.) Then, growth stocks outperformed through 1980, and value stocks have pretty much dominated through 1997. (As it was to happen - RTM at work again? - growth stocks returned with a fury to preeminence in 1998.)
When all of these cyclical fluctuations for the full six decades were linked, the terminal investment in value stocks was equal to about nine-tenths of the investment in growth stocks. For the full 60-year period, the compound total returns were: growth, 11.7 percent; value, 11.5 percent - a tiny difference. I'd call that match a standoff - and another tribute to RTM.
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