Clairvoyant Value and the Growth–Value Cycle

Abstract

The concept of ClairvoyantValue, introduced by the authors in the Spring 2009 issue of this journal, facilitates exploration of how the market prices future growth expectations across securities and over time. The authors find both concurrent and predictive links between the intertemporal change in the Valuation Dispersion—the relative valuation gap between growth and value stocks—and the observed growth-value “cycle” in the market. On average, the dispersion is twice as wide as subsequent financial results would justify; that is, the market historically has overpaid for growth. The authors also show that a wide dispersion in valuation multiples has tended to precede periods of exceptional performance by value stocks relative to growth stocks. The total wealth effect of investing in a ClairvoyantValue portfolio provides value for a company’s future business prospects, but perhaps a bit less so than might be surmised.