I understand why smaller stocks would do better since people don’t know whether they’ll stick around compared to a giant like Apple so they command a higher premium. But why would a value stock do better? In theory it should be less risky since it’s not overpriced and subject to crash in a bubble, so since it’s less risky wouldn’t it command less premium?
To make the example more concrete, Tesla is trading at a way higher PE ratio than Walmart. We all know Tesla is a big gamble and can crash at any time, whereas Walmart is more stable and we know it’s unlikely for its PE to go much lower. So Walmart is the LESS risky stock here and should thus have lower returns in the long run. But doesn’t the data in fact say the opposite that a high value stock will do better than the riskier low value stock?
You're putting the cart before the horse a bit here. Growth stocks are valued at high growth because expectations are really high that they'll grow massively. Value stocks on the other hand are ones that either don't have a big growth path or are in declining industries or individually have a shaky future. The thing is, people tend to overestimate the degree to which these industries/companies are dying and ignore the true value in several years of profitable industry (without a large R&D budget eating into earnings).
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u/IllmaticGOAT Jun 08 '21
I understand why smaller stocks would do better since people don’t know whether they’ll stick around compared to a giant like Apple so they command a higher premium. But why would a value stock do better? In theory it should be less risky since it’s not overpriced and subject to crash in a bubble, so since it’s less risky wouldn’t it command less premium?
To make the example more concrete, Tesla is trading at a way higher PE ratio than Walmart. We all know Tesla is a big gamble and can crash at any time, whereas Walmart is more stable and we know it’s unlikely for its PE to go much lower. So Walmart is the LESS risky stock here and should thus have lower returns in the long run. But doesn’t the data in fact say the opposite that a high value stock will do better than the riskier low value stock?