Study: Biases — Not Risk — Are Behind Value’s Outperformance

A new study shows that value investors who remain patient and rational tend to make out better in the market than those who buy up flashier stocks.

According to Canada’s Financial Post, the study — performed by The Brandes Institute — examined how stocks performed in the year after reporting earnings. The findings: Value stocks on average rose, whether they beat earnings expectations or not; “glamour” stocks — big names in flashy industries like technology — lagged the value stocks’ returns whether they beat expectations or not.

The study’s authors conclude that this shows that value stocks outperform glamour stocks not because they are riskier, as many academics believe, the Post says. Brandes instead argues that behavioral biases such as overoptimism, overreaction and anchoring are responsible for value stocks’ outperformance of glamour stocks.

“Brandes concludes investors in value stocks proceed from overreaction to revision to sentiment shift and multiple expansion,” writes the Post’s Jonathan Chevreau. “Glamour stock investors experience overoptimism, revision, disappointment and multiple contraction. The authors conclude purchasers of value stocks tend to exploit behavioral biases rather than succumb to them. As these biases weaken over time, stock prices revert from extremes, creating opportunities for investors who stay patient and rational.”

Brandes — part of Brandes Investment Partners LP — examined data from the largest 50% of global securities in developed markets from 1990 to 2009 for the study, according to the Post.

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