If value stocks outperform in the long-run…

A question from Yahoo! Answers:

If academic research demonstrates that value stocks have higher returns than growth stocks why not invest all in value stocks?

Because that will get you fired periodically. Lots and lots of value managers have severely underperformed (and, as a result, lost a lot of client business) during the episodes of growth outperformance, including the last one, the Internet boom.

It is not uncommon for value strategies to perform very well in the long-run, while producing a disaster every now and then. Charles Munger, Warren Buffett’s sidekick, had done very well over the long haul (he ran his own firm between 1962 and 1975), but still produced 30-percent losses two years in a row (1973 and 1974). I wonder if this is why he closed up shop and partnered with Buffett in 1975…

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