The Price/Book ratio has probably been the most important valuation ratio of the past century. If you look at the academic research that supports value investing, you won’t find any other ratio that is referenced more often. There is also no ratio that is used more by systematic value funds. But the rise on intangible assets and other factors have led many to question whether the ratio has value any more. , we look at… Read More
By Jack Forehand, CFA The Price/Book has probably been the most important valuation ratio of the past century. If you look at the academic research that supports value investing, you won’t find any other ratio that is referenced more often. When Fama and French built their famous 3 factor model, value was measured using the Book/Market, which is the inverse of the Price/Book, and much of the academic research since then has followed suit. Since many… Read More
By Jack Forehand (@practicalquant) — No investing factor has been maligned more than the Price/Book in recent years. In a period where value in general has performed very poorly, the Price/Book has struggled more than any of the other common value factors. When you couple that with the fact that the Price/Book’s failure to account for intangible assets makes its validity questionable in a world where more than 80% of assets are intangible, you have a… Read More
This is Part II of my interview with Tobias Carlisle of the Acquirer’s funds, which just released its first ETF, the Acquirer’s ETF (ZIG) earlier this year. In Part I, we talked about some of the arguments against value investing and how they can be refuted. You can read that here. In Part II, we talk more about the intricacies of building a value portfolio. As a reminder, this interview was taken from a phone… Read More
A recent Forbes article suggests that true value investing requires a comprehensive approach to analyzing companies, not just a reliance on the price-to-book value. The article cites two comments made by Berkshire Hathaway CEO Warren Buffett in 2018 might “serve as the epitaph on the grave of the old era of value investing. The first, from Buffett’s 2018 letter to Berkshire shareholders, reads: “The fact is that the annual change in Berkshire’s book value…is a… Read More
By Jack M. Forehand (@practicalquant) — Factor investing requires a lot of patience. Despite the fact that research shows that many factors can produce outperformance over long periods of time, all of them will struggle at times in the short-term. And those struggles are typically long and difficult enough that most investors will abandon underperforming strategies in favor of what is working now. When that happens, that typically signals a bottom for the factor is… Read More
Article Summary Warren Buffett reports Berkshire’s book value in Berkshire’s Annual Letter, but Buffett admits it is not perfect in determining the value of a firm. The price-to-book ratio is a popular factor, taking book value into consideration, but the effectiveness of this value factor has been fading recently. A prominent quantitative firm shows how share buybacks may be clouding price-to-book’s usefulness. The takeaway for investors is no factor is perfect. ———————- How does an… Read More
This describes the first investment approach outlined in the Tweedy Browne Company publication entitled What Has Worked In Investing referenced in yesterday’s blog post. The net current assets approach was developed and tested by Benjamin Graham between 1930 and 1932 and is described by Tweedy as the “oldest approach to investment in groups of securities with common selection characteristics of which we are aware.” The technique involves identifying and purchasing those stocks which are “priced at… Read More
The value premium may seem to have disappeared. Since 1926, cheaper stocks have outperformed expensive ones by 400% according to data from Normura (see graph below). Since February 2007, however, a value investor relying on price-to-book, which is the traditional measure of value and defining trait of the Russell 1000 Value Index, would not have reaped the gains that one would expect from this historical data. Why? Barron’s reports that, according to Joseph Mezrich of… Read More