MISTAKE 22Do You Confuse Great Companies with High-Return Investments?

One of the most persistent and incorrect beliefs among investors is that “growth” stocks have provided (and are expected to provide) higher returns than “value” stocks. Growth stocks are stocks of the glamorous high price-to-earnings (P/E) or low book-to-market (BtM) companies, while value stocks are the stocks of distressed companies, trading at low P/E ratios and high BtMs. The problem arises from the confusion between earnings generated by growth companies and returns earned by their shareholders. Let us explain.

It is true that growth companies outearn value companies. For example, for the period ending in 2010, the return on assets for growth stocks was 9.2 percent per ...

Get Investment Mistakes Even Smart Investors Make and How to Avoid Them now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.