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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: accountclosed who wrote (46021)	2/7/1999 7:10:00 PM
From: John Koligman	Respond to of 132070

While on the subject of the NY Times, no comments today on this article concerning the possibility that value investing is not all that it's cracked up to be??? John Why the Tortoise Isn't Beating the Hare Related Articles The New York Times: Your Money Forum Join a Discussion on Investing By MARK HULBERT hese are the times that try value investors' souls. The best-performing stocks over the last five years have been the sort that value advisers say we should avoid -- companies with sky-high price-to-earnings and price-to-book ratios, like America Online and Dell Computer. Value investors try to find solace in numerous academic historical studies that have concluded that over the very long run, value outperforms growth. But the patience of these investors is wearing thin. Last year, the average growth stock in the Standard & Poor's 500-stock index trounced the average value stock in the index, 42.2 percent to 14.7 percent, its widest margin ever, according to Barra Inc., a research firm in Berkeley, Calif. The firm breaks the index into the S&P/Barra Growth Index and S&P/Barra Value Index, based on its component stocks' price-to-book ratios. The wait may go on for value investors. Some recent evidence suggests that value's historical advantage is not as pervasive as past studies seemed to show. Among a big portion of stocks, it may be nonexistent. Perhaps the best illustration comes from the long-term performance of the group of growth stocks known in the early 1970s as the Nifty 50, an informal collection of large-capitalization, fast-growing stocks that brokerage firms -- some with different Nifty 50 lists -- were pushing as sure bets. In the early '70s, investors didn't think twice about paying 70, 80 or even 100 times earnings for Nifty 50 stocks like Merck and Xerox. Because they were among the biggest casualties of the 1973-74 bear market, the Nifty 50 stocks have long served as Exhibit A in value investors' argument about the supposed folly of growth-stock investing. Nevertheless, the long-run performance of these stocks has been surprisingly good, according to a study of Morgan Stanley's Nifty 50 by Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania. Siegel found that if an investor had bought a basket of these stocks at the bull-market high in December 1972, just before the 1973-74 bear market, and held them through August 1998, his long-run performance would be just about as good as that of the S&P itself -- about 13 percent, annualized. Reviewing the results, Siegel concluded that "as a group, the Nifty 50 were worth the price paid by investors at the bull market peak of the early 1970s." Results like Siegel's have led researchers to dig below the surface of the historical studies that find value stocks outperforming growth stocks. One who did so was Tim Loughran, a professor at the University of Iowa, who discovered a major qualification: Value significantly outperforms growth only among the smallest stocks. Among the 20 percent of companies with the largest market caps, a category well represented by the S&P 500, there is no significant difference in the performance of value and growth stocks, he concluded in a study published in the Journal of Financial and Quantitative Analysis. That quintile accounts for three-quarters of the market value of U.S. equities. These findings help explain why the S&P/Barra Value index has failed to outperform the S&P/Barra Growth Index over the long run. In the 20 years through 1998, the two indexes' annualized returns are similar -- with the Growth Index slightly ahead, 17.8 percent to 17.2 percent. What size must companies be in order for a value-oriented approach to outperform a growth-oriented one? According to Loughran, value strategies work best among the bottom 20 percent of stocks, as ranked by market capitalization. (To be among this group today, a company's market cap must be no larger than about $200 million.) A value approach in this group returned 11 percentage points more per year, on average, than a growth-oriented one. Value approaches also work with somewhat larger stocks, though the outperformance falls by about half. But don't expect value approaches to outperform growth significantly among the biggest 20 percent of companies: Loughran said the tiny 1.8 percent difference he tracked was likely due to statistical aberrations.