Charles Brandes: Value vs. Glamour: A Global Phenomenon

In 1934’s Security Analysis, Benjamin Graham and David Dodd argued that out-of-favor stocks are sometimes underpriced in the marketplace, and that investors cognizant of this phenomenon could capture strong returns. Conversely, the duo theorized, prices for widely popular stocks often are buttressed by high expectations and could be vulnerable if these expectations prove too enthusiastic.1

The philosophy espoused by Graham and Dodd is now widely known as value investing, and the unpopular “value” stocks they advocated often are associated with companies experiencing hard times, operating in mature industries, or facing similarly adverse circumstances. Alternatively, typically fast-growing “glamour” companies frequently function in dynamic industries with a relatively high profile. This stark contrast in attributes leads to a natural question: which stocks have performed better, value or glamour?

While this is not a simple inquiry, we believe historical analysis can shed light on the relative performance of value stocks and glamour stocks – largely because their divergent traits often manifest in their respective valuation metrics. Specifically, value shares typically feature low price-to-book, price-to-earnings, or price-to-cash flow ratios, while glamour stocks generally are characterized by valuation metrics at the opposite end of the spectrum. As a result, these metrics can be used to split a sample of equities into either the value or the glamour camp – and subsequently track each group’s performance over time.

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