when growth stocks catch the eye of speculative investors, that these
value-based strategies will underperform capitalization-weighted
strategies.
But these strategies have gained these back—and more—during
subsequent bear markets. The Dow 30 was down by 26.5 percent, and
the S&P 500 Index was down 37.3 percent during the 1973 to 1974 bear
markets. But the S&P 10 strategy fell only 12 percent while the Dow 10
strategy actually gained 2.9 percent in these two years.
These dividend strategies also resisted the 2000 to 2002 bear mar-
ket. From the end of 2000 through the end of 2002, when the S&P 500
Index fell by more than 30 percent, the Dow 10 strategy fell by only less
than 10 percent, and the S&P 10 strategy fell by less than 5 percent.^15
These high-dividend strategies have provided investors with higher re-
turns and lower volatility over the past five decades.PRICE-TO-EARNINGS (P-E) RATIOS
Another important metric of value that can be used to formulate a win-
ning strategy is the P-E ratio, or the price of a stock relative to its earn-
ings. The research into P-E ratios began in the late 1970s, when Sanjoy
Basu, building on the work of S. F. Nicholson in 1960, discovered that
stocks with low price-to-earnings ratios have significantly higher re-
turns than stocks with high price-to-earnings ratios, even after account-
ing for risk.^16CHAPTER 9 Outperforming the Market 149
TABLE 9–3
Dow and S&P 500 High-Dividend Strategies(^15) After 2003 the Dow 10 strategy lagged the Dow 30 for several years, mostly because of the poor
performance of General Motors, which continued to pay a dividend until it was cut in half in 2005.
(^16) S. F. Nicholson, “Price-Earnings Ratios,” Financial Analysts Journal, July/August 1960, pp. 43–50,
and Sanjoy Basu, “Investment Performance of Common Stocks in Relation to Their Price-Earnings
Ratio: A Test of the Efficient Market Hypothesis,” Journal of Finance, vol. 32 (June 1977), pp. 663–682.