10.2 Value and Growth Anomalies

Value and growth investing are two distinct strategies in the stock market. Value focuses on undervalued stocks based on current fundamentals, while growth targets companies with high future potential. These approaches differ in risk, timeframe, and performance across market cycles.

Behavioral biases play a significant role in stock mispricing. Overreaction, representativeness, herding, anchoring, and availability biases can lead investors to misprice both value and growth stocks. Understanding these biases helps explain market anomalies and investor sentiment cycles.

Value and Growth Investing Strategies

Value vs growth investing strategies

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Top images from around the web for Value vs growth investing strategies

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  Relative Value Update, Emerging Markets Look Particularly Attractive – Brightwood Ventures LLC View original

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  Market-Value Ratios | Boundless Accounting View original

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• 

  AlterEvo Ltd: ISO 55001 Asset Management as a tool for Value Investing View original

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  Relative Value Update, Emerging Markets Look Particularly Attractive – Brightwood Ventures LLC View original

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• Value investing focuses on undervalued stocks trading below intrinsic value based on current fundamentals (P/E ratio, book value)
• Growth investing targets companies with high future growth potential in earnings/revenue (tech startups, emerging industries)
• Value typically has longer investment horizon seeking underappreciated assets to realize full value
• Growth can have shorter timeframes capitalizing on rapid expansion phases
• Value generally considered lower risk, growth offers higher risk/return potential

Behavioral biases in stock mispricing

• Overreaction bias causes investors to excessively punish value stocks on bad news while overhyping growth prospects
• Representativeness heuristic leads to stereotyping companies based on recent performance ignoring mean reversion
• Herding behavior drives investors to popular growth stocks and away from unfashionable value picks
• Anchoring bias fixates on past prices/valuations impeding adjustment to new information
• Availability bias overemphasizes easily recalled company information neglecting key fundamentals

Performance of value-growth anomalies

• Long-term value premium shows historical outperformance of value stocks over extended periods
• Economic cycles impact performance with value outperforming in early recovery stages
• Market volatility tends to favor more resilient value stocks during downturns
• Sector rotation shifts investor preference between value and growth over time
• Size effect interacts with value-growth dynamic (small-cap value vs large-cap growth)
• Interest rates influence performance with value benefiting from rising rates

Investor sentiment in market anomalies

• Sentiment indicators like consumer confidence index and investor surveys signal market mood
• Momentum amplifies growth stock performance through trend-following
• Media coverage bias favors exciting growth narratives over mundane value opportunities
• Institutional vs retail behavior differs with institutions preferring growth in bull markets
• Sentiment cycles create periods of excessive optimism/pessimism impacting valuations
• Mispricing occurs from overvaluation of growth in euphoric times and undervaluation of value stocks during fear