In the family tree of investors that began with Benjamin Graham sits a quiet, 100-year-old firm called Tweedy, Browne. This week they published a chart that offered a new angle on a key debate in the world of personal finance: Is value investing dead—or is it just resting?

Before I get into the details of the Tweedy chart, I’ll back up and first recap the concept of value investing and why there’s a debate about it.

What does it mean to be a “value” stock? The simplest definition is that it’s a stock selling for less than it’s worth. Investors who favor value stocks—known as “value investors”—like to say that they are trying to buy a dollar for ninety cents (or less), with the hope that the price eventually rises to a dollar.

The opposite of a value stock is a “growth” stock. Unlike value investors, growth investors aren’t as concerned with finding bargains. Instead, they are simply looking for strong, fast-growing companies. Their view is that the share price of a growing company will inevitably rise.

How exactly is a stock determined to be a value stock? In some ways, value is in the eye of the beholder. To some, Amazon shares at $3,300 represent a bargain. Because its future looks so bright, they think the stock’s actually worth far more. Other investors, meanwhile, might look at Amazon’s price/earnings ratio of 85—three times the overall market average—and see a stock which looks wildly overpriced. So value is, to some extent, subjective.

But for practical purposes, the companies that build stock market indexes are the formal arbiters of growth and value, and they each have a methodology for categorizing stocks. Here, for example, is how Standard & Poor’s makes the distinction between growth and value:

• A stock goes in the value category if it’s inexpensive according to three ratios: price-to-earnings, price-to-book value and price-to-sales.
• A stock goes in the growth category if, as you might guess, it has exhibited strong growth in sales, profits or share price.

If value stocks are stocks selling at low prices, isn’t that a bad sign? Strong companies have popular stocks, and popular stocks tend to be expensive. So if a stock is inexpensive, you might conclude that the company is financially weak. That may be true in some cases, but not all. Consider the five largest companies in the S&P 500 Value Index: Berkshire Hathaway, JP Morgan, Walt Disney, Johnson & Johnson and Intel. They might not be as strong as the five largest in the Growth Index—Apple, Microsoft, Amazon, Facebook and Tesla—but I would hardly call them weak.

The more important point is this: The valuations on value stocks are much lower than those of their growth peers. And lower valuations tend to be correlated with higher future returns. The logic is simple: All things being equal, it’s better to pay less for something than to pay more. This is a value investor’s primary concern.

Benjamin Graham used to make an analogy to a cigar butt on the ground, used and soggy. The idea of picking it up seems distasteful, so it’s hard to imagine anyone paying much for it. But there might be one puff left in it. And if it’s lying on the ground and costs you nothing, then it does technically represent a value. You’re getting it for less than it’s worth. This analogy is a little hokey, but it helps illustrate why a low share price isn’t necessarily a bad thing. A company might not be flawless—it might not be Apple or Amazon—but if the stock is inexpensive relative to its value then it could be a profitable investment.

How have value stocks performed? Over time, value stocks have performed demonstrably better than growth stocks. Over the past 90 or so years, value stocks have, on average, outperformed growth stocks by 4.5 percentage points per year. On an annual basis, value stocks have beaten growth stocks more than 60% of the time.

What does that mean in dollar terms? Between 1970 and 2019, $1,000 invested in growth stocks would have turned into $72,000. But if you had invested that same $1,000 in value stocks, it would have grown to $153,000.

But more recently, this trend has reversed in dramatic fashion. Over the past ten years, growth stocks have returned 17.2% per year while value stocks have returned far less—just 10.5% per year. It’s been a spectacularly disappointing time for value investors.

If value stocks have lagged for so long, isn’t that a sign that maybe times have changed—that what worked in the past doesn’t work anymore? I don’t subscribe to the idea that “value is dead.” If you refer back to the numbers above, you’ll note that value stocks still delivered 10.5% per year, which is right in line with—if not slightly above—the overall market’s long-term growth rate. The only problem is that it pales in comparison to growth stocks, which have been firing on all cylinders. Like a person of average height standing next to an NBA player, it’s an unfair comparison, and I believe it leads to the wrong conclusion.

My view is that recent years—in which we’ve seen multiple companies cross the trillion-dollar mark for the first time—have been an anomaly. If you were to run down the list of the top companies in the value category, I think you’d agree they’re not bad companies; they’re just not colossuses like Apple or Amazon. In fact, the top holding in the value basket, Berkshire Hathaway, is the company that Warren Buffett runs. This is a world-class company by any standard.

This brings me back to the Tweedy, Browne chart. It’s titled “The Historical Tug of War Between Growth and Value,” and it illustrates how the market has oscillated between periods of outperformance by growth and by value. In recent years, growth has trounced value. But just before that, value outpaced growth for seven years in a row (2000-2006).

What does this mean for structuring a portfolio? If the market oscillates between growth and value, and growth has been dominant in recent years, does that mean it’s time to load up on value? Here’s my view:

• The long-term data clearly favor value stocks. Yes, the market oscillates, but as Tweedy’s chart illustrates, value has notched many more winning years than growth.
• There is a logical reason to believe value will outperform from this point forward. Growth stocks are priced for perfection, while value stocks have margin for error. The price-to-earnings ratio of growth stocks today is 30; for value stocks it’s just 17.
• But things can change. There was a point in the past, I’m sure, when the historical data would have argued in favor of buying the manufacturers of stage coaches or buggy whips.

The bottom line: I wouldn’t give up on value. What I recommend is a “tilt” toward value stocks—that is, a modest overweight. While the jury is still out, my view is that value is just resting, not dead.