What happened
For about 13 years after the financial crisis, the classic academic value measure — buying cheap stocks on price-to-book and selling expensive ones — lost money. Growth stocks, especially large technology companies, did spectacularly well.
Three explanations stand out, and they overlap:
- Near-zero interest rates. When money is almost free, profits far in the future are worth nearly as much as profits today. That favors long-dated growth stories over companies earning cash now.
- Book value got stale. Software, brands and research are expensed rather than recorded as assets. Price-to-book, the old academic measure, misclassified many strong modern businesses as "expensive."
- The gap in valuations widened. Much of growth's win came from its stocks simply getting pricier, not from their businesses outgrowing value companies by that much.
What happened next
When inflation and interest rates returned in 2021–2022, the trade reversed hard. Value indices beat growth indices by a wide margin in 2022, a year in which many high-flying growth stocks fell more than 50%. It didn't erase the whole decade, but it showed the premium was dormant, not dead.
What it means for you
- Long droughts are part of the deal. Value has had multi-year losing stretches before: the late 1920s, the "Nifty Fifty" early 1970s, the dot-com late 1990s. Each ended.
- Use more than one measure. Screens using earnings, cash flow and quality held up better than price-to-book alone. That's why we run Magic Formula and Quality alongside the classic Graham screens.
- Pair value with momentum. Momentum tended to do well exactly when value struggled.
Educational content, not investment advice. Past performance — of people, papers, or backtests — doesn't guarantee future results. Do your own homework before buying anything.