Time and time again, value investors have triumphed over the market. Not only that, but value investors have been winning for well over half a century and still have wound up on top today. In a market that's usually viewed as far too efficient to let anyone routinely outperform it, a half-century of dominance is an absolutely phenomenal track record.

Virtually all of the greatest investors -- Warren Buffett, Benjamin Graham, Charles Munger, John Neff, Walter Schloss -- earned their fortunes by following value principles. They've done so well not because value stocks have grown faster than so-called growth stocks. Instead, they've triumphed because stocks are priced largely based on their expected growth rates. More often than not, those expectations are wrong. When you know that the market's quite often wrong, your job becomes figuring out in which direction it's wrong, and investing accordingly.

Take two hypothetical companies, each generating $1 of income this year. The first company is expected to double in size for each of the next 10 years, whereas the second one is expected to be fairly stagnant for the foreseeable future. If all else were equal, as an investor, which one would you rather own?

Yeah -- I'd rather own the faster-growing company, too. Nearly all of us would. After all, next year's $2 of expected earnings of the fast-growing company is worth more than next year's $1 for the stagnating company. As time goes by, the differences just get more and more staggering.

There is, of course, a catch: Since everyone would rather own the faster-growing company, its stock will be priced higher. To illustrate how this works in practice, let's look at a handful of companies, each of which earned between $1 billion and $1.5 billion over the past four reported quarters.


TTM Earnings

Expected FIve-Year
Growth Rate

Market Cap

KeyCorp (NYSE:KEY)

$1.2 billion


$15.1 billion

General Mills (NYSE:GIS)

$1.1 billion


$18.8 billion

Waste Management (NYSE:WMI)

$1.2 billion


$20.0 billion

Northrop Grumman (NYSE:NOC)

$1.4 billion


$22.9 billion

Sears Holdings (NASDAQ:SHLD)

$1.2 billion


$27.0 billion

Franklin Resources (NYSE:BEN)

$1.2 billion


$28.9 billion


$1.1 billion


$45.1 billion

Generally speaking, among companies with similar earnings, the higher the expected growth rate, the higher the market values the company. That would be fine if companies always met expectations and if the expectations themselves were always based on realistic presumptions. They're not. Every company eventually hits a wall, and its growth slows. Things like competitive pressures, the overall size of the market, and problems in scaling internal operations to meet demand affect every company.

Why value wins
When the inevitable slowdown hits, the market reacts quickly and metes out the worst punishments to companies whose growth was expected to be the highest. On the flip side, stellar growth is no big deal in a company that was already priced for perfection, but any growth may be a positive surprise in a company from which investors anticipated stagnation.

As a result, what matters most to investors' short-term performance isn't what their companies actually earn, but how those companies do as compared with expectations. If the market's expectations are low enough, then merely staying alive will be enough to beat those expectations.

That's the secret behind the long-term success of value investing and of those great practitioners who have come before us. The lower the hurdle, the easier it is to clear. And the easier that hurdle is for your companies to clear, the better off you'll be.

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At Motley Fool Inside Value, we've taken that lesson to heart. By following in the footsteps of the value-investing greats, we're enjoying market-beating performance, today. If you really want a shot at trouncing the market, then you really need to follow an investing plan with proven, long-run staying power. Join us at Inside Value to begin building your wealth today. Your 30-day free trial starts here.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company mentioned in this article. eBay is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.