Value

Cheap stocks outperform expensive ones — on average, over long horizons.

HML (High Minus Low)Book-to-marketPrice-to-book inverseEarnings yieldCash flow yield

Typical IS Sharpe

0.4 – 0.8

Typical OOS Sharpe

0.1 – 0.4

Capacity

Large-cap

Signal decay

~36m half-life

Low turnoverLong-only viable

Overview

The value premium — the tendency of stocks with high book-to-market (B/M) ratios to outperform growth stocks — was the defining anomaly of the 1990s and underpins the Fama-French three-factor model. Fama and French (1992, 1993) showed that B/M ratio subsumes much of the cross-sectional variation in stock returns that beta alone cannot explain. The premium has been documented globally, across asset classes, and in variants using earnings yield, cash flow yield, sales-to-price, and other cheapness measures. However, value underperformed dramatically from 2007–2020, prompting debate about whether the premium has been arbitraged away or whether it is temporarily suppressed by macro conditions.

Economic Intuition

Two schools of thought: (1) Risk-based — value stocks are fundamentally riskier, particularly during recessions when their distress risk peaks. Investors rationally demand compensation. (2) Behavioral — investors systematically extrapolate past growth rates, overpaying for glamour stocks and abandoning beaten-down value stocks. Mean reversion in fundamentals then rewards patient value investors. Asness et al. (2013) show that value works alongside momentum across many markets, while the two are negatively correlated, suggesting a diversification benefit. The "intangibles adjustment" literature argues that standard B/M understates value in modern R&D-intensive firms.

Out-of-Sample Evidence

Mixed OOS evidence

Value is the most contested major factor for out-of-sample survival. The 2007–2020 drawdown — the longest in the factor's recorded history — raises real questions. AQR, Research Affiliates, and others have argued the premium remains alive and the period is an unusually long value winter. Critics note that rising intangible capital makes B/M increasingly stale as a cheapness measure. The lesson for researchers: a long pre-publication IS Sharpe does not guarantee OOS survival when the macro regime or market structure changes materially.