Cheap stocks (high book-to-market) beat expensive ones.
Rosenberg, Reid & Lanstein; Fama & French · Journal of Portfolio Management / Journal of Finance · published 1985 · original sample 1963–1990 (reported ≈ +6.1%/yr, t ≈ 3.2)
Growth of $1 in the long-short strategy, gross of trading and shorting costs. The dashed line marks the year the paper was published — everything to its right is out-of-sample.
$1 in the long-short strategy, gross of costs. Grey = the sample the paper had; blue = everything since.
The comparison the site is built around.
| Window | Return/yr | Vol | Sharpe | t-stat | Max DD |
|---|---|---|---|---|---|
| Paper's sample (1963–1990) | +4.8% | 8.9% | 0.58 | 2.7 | -28% |
| After publication (1986–2026) | +1.5% | 10.9% | 0.19 | 1.0 | -58% |
| Full sample (1963–2026) | +3.0% | 10.3% | 0.34 | 2.3 | -58% |
Is there a risk-adjusted alpha left once you control for the standard factors? Alpha is annualized; t-stats use Newey–West standard errors.
| Model | Alpha/yr | Alpha t | R² | Biggest loadings |
|---|---|---|---|---|
| CAPM (market only) | +4.5% | 2.8 | 0.04 | Mkt-RF -0.14 |
| Fama–French 3-factor | 0.0% | 0.0 | 1.00 | HML +1.00, Mkt-RF +0.00, SMB +0.00 |
| Fama–French 5-factor | 0.0% | 0.0 | 1.00 | HML +1.00, Mkt-RF +0.00, SMB +0.00 |
| FF5 + momentum * | 0.0% | 0.0 | 1.00 | HML +1.00, Mkt-RF +0.00, SMB +0.00 |
| FF5 + mom, own factor removed | +0.9% | 0.7 | 0.51 | tests for anything left beyond the other five |
* Value (book-to-market) is itself the HML factor, so its alpha against a model that contains HML is zero by construction — the informative row is the one with its own factor removed.
Trailing 3-year Sharpe ratio. Long stretches below zero are common.
| 1960s | +2.3%/yr | Sharpe 0.35 |
| 1970s | +7.8%/yr | Sharpe 0.83 |
| 1980s | +5.9%/yr | Sharpe 0.62 |
| 1990s | +0.1%/yr | Sharpe 0.01 |
| 2000s | +8.0%/yr | Sharpe 0.62 |
| 2010s | -2.4%/yr | Sharpe -0.30 |
| 2020s | +2.1%/yr | Sharpe 0.14 |
Value firms are distressed — high leverage, fixed assets stuck in place — so they fall hardest in bad times. The premium is compensation for that risk.
Investors over-extrapolate: they bid glamour stocks too high and leave beaten-down firms too cheap, and the gap closes as fundamentals surprise.
The most-cited anomaly in finance, so the most-arbitraged. It then went through its worst drawdown ever (2007–2020) as growth/tech compounded — whether that is decay or just a long bad draw is still argued.
Long-short = the published Fama–French / Carhart factor return. Value-weighted, US equities, monthly, gross of transaction and shorting costs. The original-paper figures are approximate and annualized for comparison.