Want to shrink your returns? Buy “growth” stocks!

Overview

In Stocks for the Long Run (6^th ed., McGraw-Hill, 2023), Jeremy Siegel noted a crucial fact: “earnings growth is not the primary consideration for better long-run returns” (for details, see Everything the mainstream says about earnings is wrong, 12 March 2024). Nor, it’s important to add, is the increase of revenues. Indeed, except for dividends, nor is growth of any kind. “In fact,” Siegel rightly emphasised, “faster growth often leads to overvaluation that results in long-term underperformance.”

It’s a vital lesson which “growth investors” – most of whom are actually speculators – blithely ignore or strenuously deny, and thus never learn: rapid growth DOESN’T generate outperformance. Quite the contrary: it usually retards returns.

“History shows,” Siegel concludes, “that the most important criterion for long-term investors is to buy and hold stocks that stay reasonably priced relative to their fundamentals, (and) not to pursue those firms that grow the fastest” (see also Why We’ve Never Held Tech – and Have Long Owned Energy (2 March 2026).

In this article, I detail the powerful evidence which underpins this vital truth.

Specifically, I’ll demonstrate that, on average over all short-term (12 month), medium-term (five year) and long-term (10-50 year) intervals in the U.S. over the past century, out-of-favour and unpopular (“value”) stocks have consistently – and cumulatively massively – outperformed flavour-of-the-month (“growth”) stocks.

I’ll show, in other words, that the tortoise has usually beaten the hare. I’ll also explain why value has virtually always outperformed growth.

Speculators routinely laud the latest fast-growing company, compete to identify the next – and thereby push the prices of these “growth stocks” to unattractive levels. In contrast, a few investors seek what speculators usually shun – relatively low-growth companies whose shares sell at discounts to conservative estimates of their value.

It’s important, however, not to overstate value’s very strong case: on average it always – that is, it usually but not invariably – outperforms growth. For that reason, I also clarify a recent development. The past decade has provided the only major exception to the general rule: over these years, growth has outperformed value.

As I’ll show, value has underperformed not because its long-term returns have deteriorated (indeed, they’ve erratically yet steadily improved) but because they’ve risen less than growth’s – and growth’s have neared their all-time highs.

On this basis, some growth speculators have proclaimed “the death of value.” Their celebration is certainly premature, and it’s probably mistaken: they ignore – or perhaps don’t know – that stocks’ ten-year returns have over the past century been strongly cyclical. Given the cause of the cyclicality, which I’ll clarify, there’s ample reason to believe that it’s NOT different this time.

Accordingly, and as I’ll also demonstrate, value stocks’ prospective ten-year returns are presently attractive and growth stocks’ are unappealing. Finally, as I’ll establish with a series of simple Monte Carlo simulations, the longer the interval of time, the higher is the probability that a value portfolio will outperform a growth portfolio: indeed, for periods of 20 years or more, the odds are overwhelming: value crushes growth.

For these reasons, Leithner & Company has always been and today remains a conservative-contrarian value investor: value almost always outperforms growth, and over long periods value crushes growth. Moreover, value’s prospects are presently relatively bright and growth’s are comparatively dim.

Data

Series of valid, reliable and detailed stock market data are much longer in the U.S. than elsewhere. For this reason, I’ve analysed data compiled by Kenneth French and his colleagues (see also Why value investing crushes momentum speculation, 9 February). For each month beginning in July 1926, they rank-ordered each company listed on the AMEX, NASDAQ and NYSE according to the ratio of its shares’ price to its book value per share on the preceding 30 June. 

French et al. then assigned each company to one of three categories: (a) those ranked within the lowest three deciles (that is, the 30% of stocks whose price-to-book ratios are lowest) to the “low” category; (b) those in the four middle (40%-70%) deciles to the “middle” category; and (c) those ranked within the highest three deciles (i.e., the 30% of stocks whose price-to-book ratios are highest) to the “high” category. Finally, they computed each portfolio’s monthly total (that is, including dividends but excluding tax, brokerage and other costs) return.

Stocks whose ratios of price to book value are comparatively low (like those whose price-to-earnings (“P/E”) ratios are low, dividend yields are high, etc.) are commonly regarded as “value” stocks; those with relatively high ratios are typically considered “growth” stocks.

Over the past century, virtually all significant American companies have been listed on one or more of these three exchanges. Regional exchanges like the Philadelphia Stock Exchange (founded in 1790), Chicago Stock Exchange (1882) and Pacific Stock Exchange (which succeeded the San Francisco Stock and Bond Exchange, founded in 1882) financed local and regional companies and, in some cases, the trading of specialised securities.

The American Stock Exchange (AMEX) traces its roots to the informal and outdoor “curbstone” trading which commenced under the Buttonwood Tree at 68 Wall Street in 1792. It formalised (under the name “New York Curb Market Association”) in 1911, moved indoors in 1921 and became the American Stock Exchange in 1953. NYSE Euronext purchased AMEX in October 2008 and renamed it “NYSE American.” Today, it’s “America’s premier exchange for small-cap and high-growth companies.”

The National Association of Securities Dealers’ Automatic Quotation system (ubiquitously known as NASDAQ) has become the world’s second-largest stock exchange by market capitalisation. Since its formation in 1971 it’s disproportionately comprised IT, biotech and “high-growth innovation companies.”

Finally, the New York Stock Exchange (“Big Board”) is the world’s largest by market cap (which exceeded $44 trillion in January 2026), and it hosts many of the world’s most established “blue-chip” corporations. These presently include 70 of the world’s largest corporations and 410 of the companies which comprise the S&P 500.

Numbers of Listed Firms: Categories and Total

Figure 1 plots on a monthly basis since July 1926 the number of companies in each of the three portfolios as well as the three-category total. It eliminates double-counting (that is, counts just once companies listed on more than one exchange); it also excludes listed investment companies which hold other listed stocks; more recently, it also excludes exchange-traded funds (ETFs).

On this basis, in July 1926 a total of 429 companies were listed on America’s major exchanges. Over the next seven decades this total grew almost continuously.

Figure 1: Numbers of Listed Companies, Three Categories of Price-to-Book and Total, July 1926-December 2025

Particularly noteworthy is the jump from 2,100 in June 1971 to 3,501 one month later: this leap quantified the effect of NASDAQ’s creation in February of that year. Before its formation, stocks which didn’t meet the listing requirements of AMEX, NYSE or other exchange traded via fragmented “over-the-counter” (OTC) arrangements whereby brokers negotiated prices directly with one other.

This system produced confusion (at a given point in time, a given company’s shares often traded at different prices), opacity (broker A was usually unaware of the prices which brokers B and C had negotiated) and high bid-ask spreads (the difference between the highest price a buyer will pay and the lowest price a seller will accept; narrower spreads signal better liquidity and lower costs).

The total number of companies trading on these three exchanges peaked at 6,614 in July 1997; since then, apart from a brief burst in mid-2022, it’s been steadily shrinking: in December 2025 the total was 3,006 – a decline of 55% from the peak and among the lowest totals since NASDAQ’s formation.

Why the sharp drop? As a result of high levels of corporate consolidation, in the form of mergers and acquisitions, over time many (mostly smaller) companies have been absorbed into larger ones. Furthermore, unlisted companies have generally waited much longer to list: in 1999, the average “tech” firm listed (usually on NASDAQ) an average of four years after its formation; by 2019, this average increased to 11 years. Additionally, the increased burden and cost of public disclosure and regulatory requirements (particularly those imposed by the Sarbanes-Oxley Act of 2002) have prompted some firms to avoid listing or even to delist.

As a result of these and other factors, over recent decades the number of companies that have delisted from these three exchanges has consistently outweighed the number of initial public offerings (IPOs).

CPI-Adjusted Market Caps by Category

Figure 2 plots the three portfolios’ CPI-adjusted market capitalisations. Since July 1926, the caps of the companies in the low price-to-book (value) portfolio have averaged $1.3 billion, those in the medium portfolio $3.0 billion and those in the high price-to-book (growth) portfolio $6.6 billion. The average capitalisation of stocks in the growth portfolio has thus been ca. five times larger than in the value portfolio. Since the GFC this disparity has become extreme: in December 2025, the average market cap of stocks in the value portfolio was $3.4 billion – versus $12.2 billion in the medium portfolio and $54.3 billion in the growth portfolio.

Over time, value stocks have consistently been comparatively low-cap stocks, and growth stocks have tended ever more to become relatively high-cap stocks.

Figure 2: Market Caps of Listed Companies (CPI-Adjusted Billions of $US), Three Categories of Price to Book, July 1926-December 2025

Relative Market Caps

Figure 3, which plots the ratio of value to growth stocks’ market caps, elaborates this result. On average since July 1926, value stocks’ cap has been little more than one-quarter (28%) of growth stocks’. From July 1981 to June 1990, the ratio was at least twice its average, and from September 1983-February 1987 value stocks’ market cap exceeded growth stocks’ (that is, the ratio was greater than 100%).

Figure 3: Market Cap of Value Relative to Growth Companies, July 1926-December 2025

Thereafter, however, the ratio plunged – to as low as 4% from September 1997 to September 1998 (the all-time low of 3% occurred in January-June 1932). Since June 2018, the ratio has been below average; currently (December 2025) it’s 6%.

Results

Very Long-Term Compounding of Cumulative Returns

Figure 4 plots the total (including dividends but excluding taxes and costs of transactions), CPI-adjusted value per $1 invested in the three portfolios in July 1926.

Figure 4: Total, CPI-Adjusted Value per $1 Invested, Three Categories of Price to Book, July 1926-December 2025

• Each $1 invested in the value portfolio grew to $9,570 in December 2025. That’s a compound annual growth rate (CAGR) of 9.7% per year.
• Each $1 invested in the medium price-to-book portfolio in July 1926 has grown to $937. That’s a CAGR of 7.1% per year.
• Each $1 invested in the growth portfolio has grown to $780 (CAGR of 6.9%).
• For comparison but not plotted in Figure 4, each $1 invested in the S&Ps 500 Index in July 1926, including dividends but excluding taxes and costs of transactions, grew to $1,049 in December 2025. That’s a CAGR of 7.2% per year.

Over this 99-year interval, value has massively outperformed the other portfolios. Growth, in contrast, has underperformed everything including the Index.

Using July 1926 as a starting point, I’ve computed the CPI-adjusted total returns (expressed as CAGRs) of the four (including the Index) portfolios over increasingly long intervals; Table 1 summarises the results. 

Over all of these intervals, the Index outperformed the growth portfolio, and over all but one value outperformed the Index. Accordingly, with just one exception value outperformed growth.

Table 1: CPI-Adjusted Total Returns (CAGRs), Four Portfolios, July 1926-December 2025

Short-Term, Medium-Term and Long-Term Returns

Table 1 contains three crucial shortcomings. Most importantly, people seldom hold portfolios indefinitely. Additionally, the CAGRs in Table 1 quantify results for single intervals (e.g., the ten years from July 1926 to July 1936, 20 years from July 1926 to July 1946, etc.) rather than for ALL intervals of 10 years, etc., since July 1926. Finally, Table 1 obscures a key fact: the growth portfolio’s most recent returns over all intervals have been unrepresentative of its long-term averages.

Table 2 corrects these shortcomings. Table 1 examined just one 10-year interval; Table 2 examines all (1,072) of them, and so on for all other periods. They devastate the core claim of “growth” investing.

Table 2: CPI-Adjusted, Total Returns (CAGRs), Three Portfolios over Seven Intervals, July 1926-December 2025

Over all rolling short term (12-month), medium-term (60-month), long-term (120-month) and very long-term (20, 30, 40 and 50-year) intervals during the past century, value’s average total (including dividends), CPI-adjusted returns have exceeded growths. Further, as the interval’s length increases from five years to 10 to … to ... 50 years, the value portfolio’s CAGR remains roughly steady; in contrast, the growth portfolio’s CAGR sags.

Not only does value trounce growth: over ever longer periods, value’s outperformance rises. Moreover, over all intervals the medium price-to-book portfolio and the S&P 500 (whose returns Table 2 omits for lack of space) also outperform the growth portfolio. In this four-horse race, growth ALWAYS runs dead last!

Adding prospective insult to retrospective injury, over all intervals the growth portfolio’s most recent CAGRs exceed their averages. In contrast, over intervals of up to 10 years the value portfolio’s most recent CAGRs are much the same as their averages, and over intervals of 20-50 years the most recent CAGRS are slightly below their averages. Although I’ve omitted the details (for examples, see Stop kidding yourself: Nobody can “time the market,” 29 June 2025), the returns in Table 2 are approximately (that is, apart from “fat tails”) normally distributed.

Hence the growth portfolio’s recent outsized returns are likely to fall (that is, regress to their long-term means); conversely, the value portfolio’s recent returns are likely to remain relatively stable.

The Cyclicality of Long-Term Returns

Figure 5, which plots these portfolios’ long-term (120-month, i.e., ten-year) rolling total CPI-adjusted returns, elaborates the results in Table 2. Each of the series is highly cyclical. The growth portfolio’s most recent CAGRs are among its highest on record (albeit not quite as high as those during the late-1950s and late 1990s-early 2000s. In contrast, the value portfolio’s recent CAGRs are close to their averages.

Since the 1920s, these series have reliably regressed to their overall means. It’s therefore reasonable to expect that the growth portfolio’s subsequent long-term CAGRs will fall and that the value portfolio’s will remain roughly stable.

Figure 5: CPI-Adjusted Total Returns (CAGRs), Rolling 120-Month Intervals, Three Categories of Price to Book, July 1936-December 2025

To substantiate this key inference, for each month since July 1936 I’ve (1) calculated the growth portfolio’s total, CPI-adjusted total return (CAGR) over the previous 120 months, as well as its CAGR over the subsequent 120 months; (2) rank-ordered the data by the return over the previous 120 months; (3) divided the dataset into five equal (by numbers of observation) segments; (4) calculated the energy portfolio’s average CAGR within each quintile; and (5) repeated steps 1-4 for the other portfolios.

Table 3 summarises the results. It confirms that each portfolio’s long-term CAGRs regress to their means. The lower is a portfolio’s return during the previous 10 years (Quintile #1), the stronger it rises during the subsequent ten. Conversely, the higher are CAGRs during the previous ten years (Quintile # 5), the lower they fall during the subsequent ten.

Table 3: CPI-Adjusted Total 10-Year Returns (CAGRs), Four Portfolios by Quintile of Long-Term Past Returns, July 1936-December 2025

Regardless of portfolio, in other words, today’s returns are where yesterday’s weren’t, and tomorrow’s will likely be where today’s aren’t. This cyclicality implies very different prospective returns for the growth and value portfolios.

Recall from Table 2 that during the most recent 120 months (that is, to December 2025) the value portfolio’s CAGR was 10.0% per year. That return falls within its median quintile (# 3) returns since 1936. Table 3 indicates that over the subsequent 10 years returns within this quintile remain stable, i.e., rise, on average, 10.2% per year.

During the most recent 120 months, the growth portfolio’s CAGR was 13.6% per year. That falls within its top (#5) quintile since 1936. Returns in this quintile subsequently sag drastically – to an average of just 5.9% per year over the subsequent ten years.

Accordingly, over the next decade it’s reasonable to expect that value (expected CAGR of 10.2% per year) will handily outperform growth (5.9%).

The Death of Value?

It’s at this juncture that we can evaluate assertions about the alleged “death of value.” Some critics contend that this approach, however venerable, is now obsolete. Others maintain that it faces challenges from tech companies and particularly from intangibles such as IP, etc., which necessitate a change of focus beyond traditional fundamentals. Still others observe that returns are cyclical (see in particular Ronen Israel, et al., “Is (Systematic) Value Investing Dead?” The Journal of Portfolio Management, Vol. 47, No. 2, January 2021). Hence value’s present underperformance is temporary: it underperforms growth over some periods, then it outperforms, etc.

For the reasons I detailed in Stop calling companies better: they’re merely dearer (21 September 2025) and Intangible assets aren't as valuable as bulls assume (12 December 2025), I strongly doubt the first and second contentions; given the results of my analyses, including in this article, I regard the third contention as much more plausible.

Before anybody can credibly proclaim value’s death, he must first reliably establish it. That’s easier said than done. For each month since July 1936, I’ve subtracted the growth portfolio’s long-term (rolling 120-month) CAGR from the value portfolio’s; Figure 6 plots the results. Values greater than 0% quantify value’s outperformance of growth, and percentages less than 0% quantify its underperformance.

Since 1936 value’s long-term CAGR has outperformed growth’s by an average of 3.4 percentage points (PP) per year. Its relative performance has been cyclical. Moreover, since January 2014 value has underperformed. Indeed, since 2023 it's lagged growth by an averaged ca. 5 PP per year; this  underperformance is longer and more marked than any other.

Figure 6: CPI-Adjusted Total Returns (CAGRs), Rolling 120-Month Intervals, Value Net of Growth, July 1936-December 2025

Figure 7 demonstrates that its death has been greatly exaggerated. It plots the same data which Figure 6 did; for the sake of legibility, however, I’ve restricted its horizontal axis to the months since January 1995.

Figure 7: CPI-Adjusted Total Returns (CAGRs), Rolling 120-Month Intervals, Three Categories of Price to Book, January 1995-December 2025

Clearly, value has underperformed not because its long-term returns have fallen – indeed, over the past decade they’ve erratically yet steadily risen – but primarily because they’ve risen less than growth’s – and growth’s have neared their all-time highs.

Since January 2014, the value portfolio’s CPI-adjusted, 10-year return (CAGR) has averaged 7.0% per year, the medium portfolio’s 7.1%, growth’s 11.0% and (not shown) the S&P 500’s 8.9%. The value portfolio’s is thus (7.0% – 10.0%) ÷ 10.0% = 30% below its average since 1936; growth’s, in contrast, is (11.0% – 6.6%) ÷ 6.6% = 67% above its corresponding mean.

The assumption that long-term returns will remain cyclical, which I substantiate under Implication #2 below, reaffirms my conclusion: over the next decade it’s reasonable to infer that the value portfolio’s returns will rise relative to growth’s – mostly because growth’s will fall.

The Coup de Grâce: Monte Carlo Experiments

What happens when we incorporate fluctuations of the value and growth portfolio’s returns into the analysis? Given the parameters (means and standard deviations) of their returns over various intervals, a very large number of results – including many which could’ve but haven’t (yet) occurred – are possible. On that basis and for each period of time, what’s the likelihood that the value portfolio outperforms the growth portfolio? That it generates a negative return?

To answer these questions, I’ve conducted a series of simple Monte Carlo experiments (for background, see “Monte Carlo Simulation: What It Is, How It Works, History, 4 Key Steps,” Investopedia, 29 November 2025). In essence, I’ve 

1. created a simple mathematical model of the process (the value portfolio’s return relative to growth portfolio’s over each interval) I wish to analyse;
2. represented this process not as single values (that is, an index’s mean CAGR and its standard deviation over a given interval) but as a probability distribution which has a limitless number of theoretical results; and
3. run a very large number (10,000) of simulations of each distribution.

These simulations enable us not just to assess the variability of the value portfolio’s performance, but also to estimate its probability of outperformance. On this basis, investors can better understand risks and make more informed decisions.

As a first step, I produced 10,000 simulated observations (returns) from a probability distribution whose mean is 12.9% and whose standard deviation is 29.6% (i.e., is identical to the value portfolio’s CPI-adjusted, total 12-month return since July 1926). I then did the same for a distribution whose mean is 8.9% and whose standard deviation is 20.7% (in other words, is identical to the growth portfolio’s CPI-adjusted, total 12-month returns).

For each of these pairs of 10,000 simulated observations, I then (1) subtracted the value portfolio’s return from the growth portfolio’s; (2) calculated the mean and standard deviation of this series of 10,000 simulated relative performances, and (3) calculated the percentage of simulations whose value is greater than 0.0% (i.e., in which value outperformed growth).

Table 2 summarised the 1,192 12-month returns which have occurred for each portfolio; based upon these actual results’ parameters, each Monte Carlo simulation generated 10,000 results which could have occurred. I’ve also conducted corresponding simulations for intervals of five years, 10 years, ..., and 50 years. That’s 10,000 simulations per interval, and thus 10,000 × 7 = 70,000 simulated observations.

Table 4 summarises the results. They incorporate the volatility of the portfolios’ returns – and crush the pretensions of “growth investing.”

The large variability (standard deviations) of each portfolio’s 12-month results obscure value’s outperformance of growth. However, as the interval’s length increases this variability decreases dramatically – and so, given value’s average outperformance, does the probability that it outperforms growth.

Table 4: Results of Monte Carlo Experiments, Value versus Growth , July 1926-November 2025

Over intervals of 20 years, it’s highly likely (probability of ca. 80%) that a value portfolio will outperform a growth portfolio; over intervals of 30 or more years, its outperformance is virtually certain.

Conclusion

Value investors respect logic and evidence; hence they always ignore and occasionally defy the erratic and overconfident consensus. They strive to buy from pessimists and eventually to sell to optimists; as a result, they’ve typically experienced the satisfaction not just of solid long-term performance but also of relative outperformance.

Growth speculators, in contrast, repeatedly succumb to the crowd’s emotions and impulses, and vainly attempt to resist common sense: they’ve therefore tended to buy from optimists and sell to pessimists – and thereby suffered the disappointment of regular underperformance and the shock of occasional hefty loss.

Growth usually fails because growth speculators are unable to discipline themselves: specifically, they overconfidently extrapolate rather than prudently regress to the mean.

Value investing, in contrast, works. Over the past century, not only has it consistently generated reasonable short-term, medium-term and long-term returns: it’s almost always outperformed so-called “growth” investing (not to mention the S&P 500 Index). Not only does value work: it generally produces superior returns without additional volatility; that is, the standard deviation of a value portfolio’s returns is typically no higher than a growth portfolio’s.

Over the past decade, however, value has underperformed growth. That’s not the consequence of value’s low returns: it’s the result of growth’s unduly high (by historical standards) returns. Yet returns have always been cyclical: on that basis, as well as the results of Monte Carlo simulations, it’s reasonable to infer that value’s returns over the next decade will once again exceed growth’s.

Implication #1: I’ve Reconfirmed what Value Investors Have Long Known – and Growth Speculators Apparently Never Have

My results corroborate Benjamin Graham’s. “It has long been the prevalent view,” he noted more than 75 years ago in The Intelligent Investor (1949), “that the art of successful investment lies in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in those industries.”

“But this,” he cautioned with great understatement, “is not as easy as it always looks in retrospect.”

The “growth investor,” Graham continued, “may for example be a buyer of air-transport stocks because he believes their future is even more brilliant than the trend the market already reflects.” As Jason Zweig noted in the book’s latest (2024) edition, “air transport stocks generated as much excitement in the late 1940s and early 1950s as internet stocks did a half century later.” Like internet stocks, however, “they … turned out to be an investing disaster …”

The lesson, concludes Zweig, “is not that should avoid buying airline stocks, but that you should never succumb to the ‘certainty’ that any industry will outperform all others in the future.” From the examples he analysed, Graham drew “two morals:”

1. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors;
2. The experts do not have dependable ways of selecting and concentrating on the most promising (‘growth’) companies in the most promising (‘growth’) industries.”

Fast-growing companies, in short, tend NOT to be good investments. That’s not least because they’re relatively risky. In Graham’s words, “experience has taught us that, while there are many good growth companies …, the buyer of such shares will be too dependent on the vagaries and fluctuations of the stock market.”

The conservative – and, to be blunt, boring – pursuit of value, Graham sagely concluded, “is likely to work out better than exciting adventures into the glamorous and dangerous fields of anticipated growth.”

Implication #2: a Paradox

Value investors almost always outperform growth speculators. So why isn’t everybody a value investor? The answer is two-fold. Firstly, value investors must necessarily be contrarians. They are, in Warren Buffett’s phrase, “fearful when others are greedy and greedy when others are fearful.” Secondly, by their very nature contrarians – and thus true value investors – can never comprise more than a small minority. 

Paradoxically, as soon as sufficient numbers of people become interested in out-of-favour stocks, these stocks are no longer out of favour; and if enough people defy the consensus, they cease to be contrarians and become the crowd.

The essence of contrarianism is psychologically rather than cognitively difficult to grasp. That’s because it obliges us to do something we’re normally loathe to do: ignore the herd and think for ourselves. “You are neither right nor wrong because the crowd disagrees with you,” Benjamin Graham famously observed in The Intelligent Investor. “You are right because your data and reasoning are correct.”

His parable of “Mr Market” illustrated the stock market’s irrational mood swings. He thus urged investors to profit from folly – but NOT to succumb to it. Unfortunately, most people would sooner underperform or lose conventionally – that is, stick with the impulsive crowd – than separate themselves from the herd. For all but a few, the advice of “experts” and the erratic sway of popular opinion are comforting – and hard logic and cold evidence are forbidding.

As a result, value investors such as Leithner & Company have always been and will always be small minorities.

Implication #3: Why Growth Usually Underperforms

I’ve assumed that “growth” companies exist, that is, that they grow their revenues and earnings more rapidly than Value companies. Similarly, in Why We’ve Never Held Tech – and Have Long Owned Energy (2 March 2026) I acknowledged that techs, considered as a whole, generally grow their revenues and earnings more rapidly than companies in other sectors.

Although a few “growth stocks” likely exist, investors and speculators, including supposed “experts,” can’t reliably identify them. This is a key reason why growth almost always underperforms.

Reviewing evidence over preceding decades, in Contrarian Investment Strategy (Random House, 1979) David Dreman concluded that there’s “an imposing body of evidence (which demonstrates) just how unreliable the future (earnings) estimates of analysts are.” Subsequent research (which he detailed in the books he published in the 1990s and 2000s) has made this body of evidence even more formidable.

The implication is crucial: analysts, investors and speculators can’t forecast earnings with any reliable degree of accuracy; hence they can’t dependably identify growth stocks. Growth exists, but it isn’t identifiable – never mind predictable.

What applies to short-term fluctuations of stocks’ prices also applies to short-term oscillations of companies’ earnings: speculators mistake random fluctuation for “momentum” and “earnings growth” (for details, see Why value investing crushes momentum speculation, 9 February). On that basis and in Dreman’s words, “the range between high P/E and low P/E multiples should be much narrower.”

Why are analysts’ forecasts of companies’ earnings so poor? The most fundamental – and ineradicable – reason, of course, is that human beings are simply, that is, innately, unable to predict the future accurately and reliably. As a result, “earnings estimates” for the next 12 months are typically mere extrapolations of recent trends; they thereby exaggerate the importance of the latest events.

Hence another reason that growth doesn’t work: “experts” don’t merely mistake the random (and thus unpredictable) fluctuation of alleged growth companies’ short-term earnings as trends; they routinely overestimate these earnings (see, for example, How “consensus expectations” harm your financial health (October 13, 2025) and Everything the mainstream says about earnings is wrong, 12 March 2024).

In short, forecasts aren’t just erroneous: they’re overly optimistic because forecasters are overconfident. This inability to forecast accurately, together with overconfident forecasters and overoptimistic predictions, concluded Dreman, is “at the heart of why value strategies work (and growth approaches don’t).”

Thirdly, the returns of growth portfolios normally struggle because they rely upon high and rising – and thus increasingly unrealistic – expectations. Even rapid growth will fail to impress if it doesn’t exceed excessively rosy outlooks.

It’s ironic: companies regarded as growth companies eventually fail to grow as quickly as expected. When they fall short – examples are legion – the prices of their shares typically plunge.

Value stocks are likely to experience the opposite reaction. On the one hand, expectations are low; on the other, according to Dreman, “enough pleasant surprises occur … to lead to above-average performance.” Growth stocks eventually experience negative surprises – and such events crush the prices of their shares and crimp the returns of growth portfolios. Value stocks, in contrast, tend to experience positive surprises which boost their shares and the returns of value portfolios.

Hence another irony: it’s far safer to predict that speculators will err systematically (that is, chase high-multiple growth stocks and eschew low-multiple value stocks) than it is to predict corporate earnings! (see also How experts’ “systematic mispredictions” improve our returns, 6 August 2024).

Finally, let’s ignore the difficulties of identification and consider a genuine growth company: over the past several years its revenues, earnings, etc., have risen sharply, and these increases aren’t mere random fluctuation. It’s a crucial fact which partisans of growth ignore: in a dynamic, competitive and thus relatively free market economy, such companies are rare and uninterrupted rapid growth is even rarer.

The more successful is such a company, the more difficult the continuation of its success becomes. Accordingly, before long it’ll attract competitors – and greater competition slows or even reverses the hitherto successful company’s growth.

Almost a century ago, Ben Graham well understood what today’s partisans of growth blithely ignore or strenuously deny. In Security Analysis (1934) he wrote: “extremely few companies have been able to show a high rate of uninterrupted growth for long periods of time. Remarkably few also of the large companies suffer ultimate extinction. For most, history is one of vicissitudes, of ups and downs, with changes in their relative standing.”

And in The Intelligent Investor he added: “growth stocks as a whole (are) far too uncertain and risky … Of course, wonders can be accomplished with the right individual selections, bought at the right levels, and later sold after a huge rise and before the probable decline. But the average investor can no more expect to accomplish this than to find money growing on trees.” And the funds manager who implies that he can do so is trying to fool you – probably because he’s fooled himself.

“In contrast,” Graham concluded, “we think that the group of large companies that are relatively unpopular, and therefore obtainable at reasonable earnings multipliers, offer a sound if unspectacular area of choice … “

The regression of investment returns towards their long-term mean is, in the wise words Dreman wrote almost a half-century ago, “a fundamental if not the fundamental principle of competitive markets. And yet it never seems to have been learnt.”

Growth speculators’ myopia towards – or ignorance of – mean-regression is their gift to value investors. “The push toward average returns,” Dreman concluded, “is precisely why the superior performance of the low P/E stocks and the inferior returns of the high P/E’s are so consistent.”

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