“Since value outperformance has persisted, the obvious and necessary question is: “Why?” One traditional answer is that value stocks are riskier in some way. At market extremes in particular, value stocks can get beaten up pretty badly, so this risk hypothesis isn’t totally nuts. But since growth investing projects increasing growth into an unknown future, it seems to me that growth probably bears more risk in the aggregate. In any event, there is no clear data-driven basis to conclude that value is riskier. Moreover, since low volatility and low beta strategies have outperformed persistently, the intuitive idea that higher risk correlates to higher return does not necessarily follow either.
“I think the better answer lies in our behavioral and cognitive biases. Jack Bogle (among others) has emphasized that while value beats growth persistently on an index basis, when the data examined is real mutual fund returns, the advantage tends to disappear. In other words, we screw things up.
“As Bill Simmons recently noted in the context of NBA player evaluation: “Fans always gravitate toward unlimited potential over known commodities.” And that’s why — in a nutshell — the value premium persists.”