Stocks for the Long Run : the Definitive Guide to Financial Market Returns and Long-term Investment Strategies

comes much smaller. The largest value stocks returned 13.17 percent per

year while the largest growth stocks returned about 9.87 percent.

When the 1975 to 1983 period is removed, the return to small stocks

shrinks, as expected. But it is noteworthy that the differencein the returns

to small value and growth stocks remains large and virtually un-

changed.

The dramatic difference in the cumulative return to smallest quin-

tile growth and value stocks over the period from 1957 through 2006 are

shown in Figure 9-5. Small growth stocks have a cumulative return of

only 5.97 percent per year over the period, and $1,000 invested in De-

cember 1957 accumulated to $17,121 by the end of 2006. In contrast,

small value stocks have a cumulative return of 19.59 percent per year,

and a $1,000 investment grows to $6.42 million.

Accentuating the difference in the performance of small growth

and value stocks is that the risk measured by the beta of the small-cap

value stocks is about 1, while that of the small growth stocks is over 1^1 ⁄ 2.

CHAPTER 9 Outperforming the Market 153

TABLE 9–5

Compound Annual Returns by Size and Book-to-Market Ratio, January 1, 1958, to December 31, 2006

Small 2 3 4 Large

Value 19.59% 18.29% 17.58% 16.10% 13.17%

2 18.37% 17.53% 16.20% 16.15% 12.25%

3 15.06% 16.00% 13.90% 14.72% 12.16%

4 13.90% 12.78% 13.92% 11.43% 11.11%

Growth 5.97% 8.30% 8.85% 10.62% 9.87%

Small 2 3 4 Large

Value 15.52% 14.86% 14.64% 13.67% 12.04%

2 14.80% 13.98% 13.49% 14.50% 10.69%

3 10.91% 13.23% 10.92% 12.43% 11.18%

4 9.61% 9.11% 10.75% 9.26% 9.94%

Book-to-MarketGrowth 1.46% 4.62% 5.91% 8.73% 9.56%

Quintiles

Book-to-Market

Quintiles

Excluding Size Quintiles

1975-1983

Entire Period

Size Quintiles