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