# Value Factor > The value factor buys cheap stocks and avoids expensive ones using ratios like book to market. Learn the evidence, the long drawdown and how to build it. Source: https://learn.tradelabsai.com/research/value-factor/ Track: Research and Backtesting · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Value Factor", https://learn.tradelabsai.com/research/value-factor/ The value factor captures the tendency of cheap stocks, measured by ratios such as price to book or price to earnings, to outperform expensive stocks over long periods. It is the oldest systematic investment idea, rooted in the work of Benjamin Graham in the 1930s, and one of the most studied factors in finance. Value has delivered strong long run results historically but has also suffered some of the longest and most painful drawdowns of any factor, testing the patience of its followers. ## Measuring value | Measure | Formula | Notes | |---|---|---| | Book to market (B/M) | Book value / market cap | Classic academic measure (Fama and French) | | Earnings yield | EPS / price | Inverse of P/E. See [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/) | | Cash flow yield | Cash flow / price | Less affected by accounting choices | | Sales to price | Revenue / market cap | Works for unprofitable firms | | Enterprise multiples | EBITDA / EV | Accounts for debt. See [EV/EBITDA and EV/Sales](https://learn.tradelabsai.com/fundamentals/ev-ebitda-and-ev-sales/) | | Composite value | Average of several measures | More robust than any single ratio | ## The evidence - **Fama and French (1992)** found that book to market had strong explanatory power for US stock returns from 1963 to 1990, with cheap stocks outperforming expensive ones. - **Value premiums** have been documented across many countries and in other asset classes, such as country equity indices, currencies (relative purchasing power) and commodities, by Asness, Moskowitz and Pedersen (2013). - **The HML factor** (high minus low book to market) in Kenneth French's data earned a positive average return of several percent a year over the long run, with large variation. ## Why might value work? | Explanation | Idea | |---|---| | Risk | Cheap stocks are often distressed or cyclical and fall hardest in bad times | | Behaviour | Investors extrapolate past growth too far, overpaying for glamour stocks and underpricing out of favour ones | | Institutional constraints | Managers avoid unpopular stocks for career reasons | ## The long value drawdown **Example: Value's lost decade** From around 2007 to 2020, value stocks underperformed growth stocks by a historic margin. By some measures, the US value factor (HML) had its worst drawdown on record, losing well over half its cumulative gains relative to growth. Explanations included falling interest rates boosting long duration growth stocks, the rise of intangible heavy companies poorly captured by book value, and crowding into growth. Value then rebounded sharply in 2021 and 2022 as rates rose. Investors who abandoned value near the bottom missed the recovery. See [Recency Bias](https://learn.tradelabsai.com/psychology/recency-bias/) and [Interest Rates](https://learn.tradelabsai.com/macro/interest-rates/). ## Improving value signals - **Use multiple measures** rather than book to market alone. - **Adjust for intangibles:** capitalise R&D and brand spending to improve book value for modern companies. See [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/). - **Combine with quality:** avoid "value traps", cheap stocks that are cheap for good reasons. See [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/). - **Combine with momentum:** value and momentum are negatively correlated, so combining them smooths returns. See [Combining Signals](https://learn.tradelabsai.com/research/combining-signals/). - **Industry neutral ranking:** compare companies with peers rather than across all sectors. ## Value traps A value trap is a stock that looks cheap but keeps falling because its business is deteriorating. Examples include companies in structural decline or facing disruption. Quality filters, earnings revisions and momentum can help avoid them. See [Guidance and Earnings Revisions](https://learn.tradelabsai.com/fundamentals/guidance-and-earnings-revisions/). ## Implementing value | Approach | Notes | |---|---| | Value ETFs | Low cost, long only tilts; definitions vary | | Long short value | Purer exposure; requires shorting | | Discretionary value investing | Deep analysis of individual companies. See [Valuation Basics](https://learn.tradelabsai.com/fundamentals/valuation-basics/) | Value strategies usually have moderate turnover, which keeps costs manageable. See [Signal Turnover, Breadth and Neutralization](https://learn.tradelabsai.com/research/signal-turnover/). ## Frequently asked questions ### What is the value factor? The tendency of cheap stocks, measured by ratios like book to market or earnings yield, to outperform expensive stocks over long periods. ### Why did value stocks underperform in the 2010s? Explanations include falling interest rates favouring growth stocks, the rising importance of intangible assets missed by book value and crowding into growth. ### What is a value trap? A stock that appears cheap but keeps falling because its business is deteriorating, which quality and momentum filters can help avoid. Next, learn the factor that buys winners in [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/). ## Continue learning - Next lesson: [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/) - Previous lesson: [Factor Investing Explained](https://learn.tradelabsai.com/research/factor-investing-explained/) - Related: [Factor Investing Explained](https://learn.tradelabsai.com/research/factor-investing-explained/): Factor investing targets traits linked to long run returns, such as value, momentum and quality. Learn the main factors, the evidence and how they are traded. - Related: [Price to Sales and Price to Book](https://learn.tradelabsai.com/fundamentals/price-to-sales-and-price-to-book/): Price to sales compares market value with revenue; price to book compares it with net assets. Learn the formulas, when each works best and their main pitfalls. - Related: [P/E and Forward P/E](https://learn.tradelabsai.com/fundamentals/p-e-and-forward-p-e/): The P/E ratio compares a stock's price with its earnings. Learn trailing vs forward P/E, earnings yield, what high or low P/E means and the ratio's limits. - Related: [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/): The momentum factor buys recent winners and sells recent losers. Learn how it is built, the evidence across markets, momentum crashes and how to manage them. - Related: [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/): The quality factor favours profitable, stable, conservatively financed companies. Learn how quality is measured, the evidence and how it pairs with value.