Value factor

The value factor identifies stocks that trade at low multiples of a fundamental anchor — earnings, book value, sales, cash flow, or some blend of these. Over long historical periods and across most developed markets, portfolios systematically tilted toward cheap stocks have outperformed the broad market. The gap is the "value premium."

The generally accepted explanations are risk-based, behavioural, or both. Cheap stocks often have genuinely worse near-term prospects — that's why they're cheap — so earning the premium requires tolerating recurring periods of underperformance. Behaviourally, investors extrapolate recent growth too far, pushing expensive stocks higher than fundamentals justify and leaving cheap ones too cheap.

Value has had extended stretches of underperformance, most famously during periods dominated by large-cap growth. Its recent century of return evidence is real, but so are its multi-year drawdowns. Factor timing — trying to predict when value will work — has a poor historical record.

Value strategies vary in how they define "cheap." Single-ratio screens are simpler but more prone to sector biases; composite scores (combining several ratios) are more stable but harder to explain.