Clairvoyant Value and the Growth/Value Cycle
Posted: 6 Aug 2009 Last revised: 29 Dec 2016
Date Written: April 8, 2009
The concept of Clairvoyant Value, 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 Clairvoyant Value portfolio provides value for a company’s future business prospects, but perhaps a bit less so than might be surmised.
Keywords: Clairvoyant Value, Value Effect, Growth/Value Cycle
JEL Classification: G12, G14
Suggested Citation: Suggested Citation