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
Following value’s worst quarter of performance in a century, leading quants are “butting heads” in a hot debate over whether the strategy can survive. This according to a recent article in Bloomberg. “After kicking off the factor boom in the early 90s,” the article reports, “value is punishing the faithful three decades on. Billions are getting wiped out, quant shops are shrinking, and even its architects Eugene Fama and Kenneth French can’t quite figure out… Read More
In a speech he delivered at this year’s CFA Institute Annual Virtual Conference, NYU finance professor Aswath Damodaran said, “It is precisely times like these that matter most. You need to go back to the first principles of valuation. Everything I have learned about valuation has been in the context of a crisis.” He advised investors to stick with traditional valuation tools “with adjustments for the pandemic,” sharing the results of his analysis of more… Read More
Wes Gray is the founder of Alpha Architect, the author of Quantitative Value and Quantitative Momentum, and an expert in systematic investing. In this interview, we discuss: The recent struggles of value investing and how the current period fits into a long-term context; We also talk about the nuts and bolts of building a value strategy, including the pros and cons of value composites; The role of quality in a value portfolio. We hope you… Read More
By Jack Forehand, CFA On the surface, value investing is pretty simple. As a value investor, I want to buy stocks at a discount. I want to look at a company’s price relative to what I think it is worth, and I want to build a basket of stocks where I think that discount is greatest. In theory, the calculation of what a company is worth is a complicated process that involves projecting its cash… Read More
In this week’s Excess Returns, we are trying something new. In addition to our regular episodes, we have decided to periodically talk to some of the people we respect most in the investment community to get their insights on the issues facing investors today. For our first conversation, we talk to our friend Tobias Carlisle about value investing. Toby is probably the smartest value investor we know. He is the author of four books on… Read More
Gotham Asset Management’s Joel Greenblatt sees better opportunities for value investing on the horizon, based on a recent study by his firm. This according to an article in Institutional Investor. Using data from the past 30 years, Gotham valued all the stocks in the S&P 500 without adjusting for interest rate changes. The analysis showed that the market has been cheaper for investors about 88 percent of the time and, at similar valuation levels, market… Read More
In a recent interview with Barron’s, veteran stock picker Chuck Royce said that active management and value investing will survive, and small-caps are headed for a rebound. Here are highlights from the interview: Regarding the outperformance of large-caps in the past decade, which Royce characterizes as a “megacap bubble”, he anticipates “growing investor disenchantment” with large companies that are generating persistent losses, “which could be a catalyst for increased interest in the opposite—small-caps with proven… Read More
Picking the right value metric can be one of the biggest challenges of quantitative value investing. Although the Price/Book is the most widely used value metric, its struggles in recent years and valid concerns that have been raised about its viability in a world dominated by intangible assets have led many to question whether it still works. But the other widely used value metrics also have their own problems. In this week’s episode, we discuss… Read More
In an interview with Morningstar last November, International Value Advisors CIO and portfolio manager Charles de Vaulx outlines what he sees as headwinds for value investing. De Vaulx cites the following major headwinds for value investing: Interest rates: One of the most powerful headwinds, says de Vaulx, has been what he described as “ultra-low” interest rates that have been distorted by central banks and have “resulted in misallocation of capital in some value-friendly industries.” When… Read More