CONTRARIAN INVESTMENT 303using C/P and GS, and in 17 out of 22 years using the B/M ratio. As we
move to longer horizons, the consistency of performance of the value strat-
egy relative to the glamour strategy increases. For all three classification
schemes, the value portfolio outperforms the glamour portfolio over every
five-year horizon in the sample period.
These numbers pose a stiff challenge to any risk-based explanation for
the higher returns on value stocks. Consider the (C/P, GS) classification.
Over a three-year horizon, the value strategy underperformed the glamour
strategy in only two instances. In those instances, the magnitude of the
value strategy’s underperformance was small relative to its mean outperfor-
mance of 46.4 percent. Over any five-year horizon in the sample, the value
strategy was a sure winner. Even for a one-year horizon, the downside of
this strategy was fairly low. To explain these numbers with a multifactor
risk model would require that the relatively few instances of underperfor-
mance of the value portfolio are tightly associated with very bad states of
the world as defined by some payoff relevant factor. Put another way, the
Figure 8.2. Year-by-year returns: Value minus glamour. At the end of each April be-
tween 1968 and 1989, 9 groups of stocks are formed. The stocks are independently
sorted in ascending order into 3 groups (1) bottom 30 percent, (2) middle 40 per-
cent, and (3) top 30 percent based on each of two variables: cash flow-to-price (C/P)
and growth-in-sales (GS). The value portfolio consists of those stocks in the highest
C/P groups and the lowest GS group. The glamour portfolio consists of those stocks
in the lowest C/P group and the highest GS group. The numbers presented are an-
nual buy-and-hold returns for the value portfolio minus returns for the glamour
portfolio. Annual buy-and-hold returns are calculated beginning at the end of April
for the given year. R indicates NBER recession years, and D indicates years in which
the CRSP equally weighted index declined in nominal terms.