A Capitalist Moment.

Few concepts in finance are as emotionally challenging to the investing public as the good company/bad stock paradigm. After all, if the purpose of equity ownership is to collect a company's future earning stream, then doesn't it make sense to own the most glamorous, rapidly growing firms?

As readers of these pages know, on average, it most certainly does not make sense. Decades of empirical research using almost any balance-sheet metric you care to shake a CRSP shtick at yield the same monotonous result: value stocks have higher returns than growth stocks. It doesn't matter when-pre-Compustat or post-Compustat-and it doesn't matter where, whether in the U.S., other developed nations, or in emerging markets. While this concept was a tough sell in the late 1990s, anyone arguing against it now will wind up buried under a mountain of affirmative data, to say nothing of recent returns.

The real mystery is no longer if, but rather why? Behavioralists like Richard Thaler, William Haugen, Josef Lakonishok, and David Dreman believe that the reason is: investors favor growth stocks, thus overpricing them and reducing their expected returns. Conversely, they underprice value stocks, thus increasing their expected returns. In other words, those able to bear the stench of bad companies can belly up for the free lunch.

~William Bernstein~