Value Investing on the S&P 500: A Study of the Index from 1990 to 2015

Albert Løchte Jensen

Student thesis: Master thesis


The purpose of this study is to investigate whether or not an investor could have achieved superior returns by following a value investing strategy compared to following a growth investing strategy on the Standard & Poors 500 from 1990-2015. The value stocks and growth stocks used to form the yearly portfolios were classified using financial ratios. The financial ratios used in this study were the Price-to-Earnings ratio, Price-toCash-Flow ratio, Price-to-Book-Value and the Historical 5 Year Growth Rate. Stocks with low values within the aforementioned ratios were classified as value stocks and vice versa with growth stocks. The stocks were sorted into equally weighted portfolios with holding periods of 12 months, consisting of value stocks and growth stocks respectively. The non-risk adjusted returns were calculated and compared for portfolios consisting of deep value stocks and portfolios consisting of deep growth stocks. On an average annual basis, the value portfolios outperformed the growth portfolios for all financial ratios. Achieving superior returns by investing in stocks that are classified using simple analysis is not necessarily contradicted by standard financial theory, such as The Efficient Market Hypothesis and the Capital Asset Pricing Model. The Fama French Three-Factor Model was deemed superior to the Capital Asset Pricing Model, when trying to explain the excess return of value stocks, but is still not considered to be a complete model. To find possible explanations beyond the boundaries of the traditional financial theory, theories regarding behavioural finance were included in the study. By reviewing the behavior and characteristics of irrational investors, one might be able to uncover possible explanations as to why a value premium can exist. In conclusion this study found that an investor can achieve higher returns on the S&P 500 by investing in value stocks compared to investing in growth stocks.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages85
SupervisorsOle Risager