I often write about the very important concepts that small stocks outperform large stocks and that value stocks outperform growth stocks in the stock market. This happens around the world, not just in U.S. Markets. Check out this brief video on the topic.
But what I haven't addressed is why. Main thing is to bring those enhanced returns to you, so you can enjoy them, right? But some of you might be curious.
Let's address the large and small question first. I think this one is pretty simple. Smaller companies are more agile, they're less weighed down by internal bureaucracy; they may be transitioning from a small company to large company - growing. Smaller companies are more capable of getting up after being knocked down - recover from difficult times. The opposite of the previous points is true for larger companies. That's why smaller company's stock outperforms larger company stock.
The value beating growth companies requires a little more explanation. First, the definition of "value" and "growth". Value is defined as a company have a higher ratio of book value to market value. Generally this means that its stock market price is lower relative to similar companies.
A growth company is opposite. Investors may believe these companies have more growth on horizon so there relative price in the market is higher. The ratio of book to market value is lower since market value is the denominator.
Think of a "value" company that has been beaten down in the market, has lost market share - still a good solid company. The Board of Directors is revitalized with new blood - and a new management team is assembled and aggressive action plans are put in place to fix the problems, regain market share, etc. Since they have been beaten into submission in the market - there is greater likelihood of recovery in company performance and stock price.
Think of a "growth" company - well known (great marketing), very successful, a triumph! They're usually generating profits hand over fist (sometimes their product/service is so compelling, that they could be a growth company before they have actually generated much profit) and seem to be able to do no wrong. What direction will they go? It's pretty much impossible to keep that kind of a run going. Other companies will steal their executives, and go after their lucrative market share. Since they have been high-flying in the market - there is a greater likelihood of a drop in company performance and stock price.