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   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on July 11 2005 ( Read the original paper in French here).


   In the long term, value securities perform better than the growth ones.


   * Paper written by André Gosselin published in "Finance et Investissements".

   It is not the first time that university researchers reveal that companies known as of growth ones (those having profits and sales growth higher than the average) show a return lower than companies known as value ones. As the growth companies seem to be better companies than the value ones, the investors do not hesitate to attribute to them higher prices and ratios in terms of price/earnings, price/sales and price/book value.

   They deserve certainly higher ratios, but not as much as those the market grants them to in general. On their side, the value companies deserve certainly lower ratios, but not as much as those the market attributes them to. This is why it is observed, in the long term, that the value securities perform better than the growth ones.

   The reasons of a better performance of the value securities.

   For the researchers of the behaviorist current, the explanation of such a phenomenon is quite simple: the investors' forecasts, as for the companies in strong growth, are based on the most recent financial results (the two or three last years), and for this reason are too optimistic. The investors completely neglect the fact that the exceptional companies cannot maintain their growth rate easily, because sooner or later the competitors react, when it is not the appearance of organization problems specific to the companies which grow too quickly.

   Not an easy job to be a portfolio manager. Your yield is likely to be better if you choose "lemons" rather than Formula One racing cars. The lemons, once their defects corrected, become highly respectable vehicles at generally ridiculous prices, whereas the Formula One racing cars, because of excessive publicity they receive, are always too expensive for the prowess they can deliver.

   Bauman, W.S., Conover, C.M., and D.R. Cox, « Are the best small companies the best investments? », The Journal of Financial Research, summer 2002, p. 169-186.

   Clayman, M., « In search of excellence: The investor’s viewpoint », Financial Analysts Journal, 43, 1987, p. 54-63.

   Kolodny, R., M. Laurence and A. Ghosh, « In search of excellence … for whom », Journal of Portfolio Management, 15, 1989, p. 56-60.

   André Gosselin

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