An investor’s preference for value or growth stocks is influenced by both biology and environmental factors, including family wealth and economic cycles. Researchers reached these conclusions after studying the portfolios of identical and fraternal twins.

Whether a person becomes a value or growth investor is partially ingrained at birth. The researchers found significantly higher correlations in investment styles among identical twins (who share 100% of their genes) than among fraternal twins (who share 50% of their genes).

Individuals who grew up relatively poor showed “significantly more value orientation in the stock portfolios later in their lives.” The study’s authors note that famous value investor Benjamin Graham grew up poor, while famous growth investor T. Rowe Price Jr. had a privileged upbringing. Less statistically significant is the state of the economy when a person enters the workforce, though recessionary periods early in a career are associated with a preference for value.

As far as demographics are concerned, older investors tend to be more value-oriented than younger investors. The median portfolio of a 65-year-old investor has a 39% lower price-earnings ratio than the median 25-year-old’s portfolio does. Investors with more human capital (higher levels of education and labor income) are more likely to exhibit a preference for growth stocks. Similarly, investors whose income is hurt more by economic downturns prefer growth stocks.

The study’s results have implications for investors. Primarily, they show the importance of understanding personal preferences. An investor with a strong preference for value may find it very difficult to adhere to a growth-oriented strategy over the long term, potentially leading to behavioral errors. The results show the importance of inquiring about the preferences of a person touting a strategy or an investment. An adviser with a growth orientation may not be a good fit for investors who prefer value strategies. Though not covered in the study, holding period preferences are also important to consider. An investor who has had a preference for buying and holding in the past should think twice before adopting a shorter-term momentum strategy, no matter how promising the returns sound.

Source: “Value Versus Growth Investing: Why Do Different Investors Have Different Styles?,” by Henrik Cronqvist, Stephan Siegel and Frank Yu, Journal of Financial Economics Volume 117, Issue 2 (August 2015).

Related

Value Investing

The Art of Value Investing

Stock Strategies

Traits to Look for in Growth Stocks