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Value Strategy Significantly Better than Others in Stock Picking

   

The perennial debate about whether value stocks or growth stocks earn the highest returns is over. Value wins hands down.

Sure growth stocks have high returns but Wall Street gurus, individual investors and everyone else far overestimate their future earnings. Value (read cheap) stocks, stocks with low price-earning, book-to-market and other financial ratios do far better in the long run.

Why?

Investors look to the past too much with growth stocks and essentially fantasize that the same stellar returns they earned will continue for the foreseeable future. They are willing to pay steep prices to buy those stocks but unfortunately, their bets never pay off.

Researchers at the University of Illinois, Harvard University and the University of Chicago found that "value strategies have consistently outperformed glamour strategies." For example, they found that a value approach outperformed a glamour (or growth stock) approach in every 5-year horizon between 1968 and 1989. Moreover, value stocks are no more volatile than growth stocks, they found.

The bottom line: instead of going for the high fliers, find solid companies that are priced relatively cheaply compared to their peers and the market as a whole.

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