Why Are Value Investors Successful

2223 Words9 Pages
Value investing is the strategy of purchasing an asset which is trading at a significant discount from its determined intrinsic value. It has long been regarded as a low risk method of providing outstanding investment returns (Klarman 2001). The investment strategy was described by Benjamin Graham and David Dodd in their book, Security Analysis (1940, p. 724). Over subsequent decades the investment approach has evolved utilizing varying fundamental methodologies but always maintaining the principle of investing when a discount to intrinsic value exists. Graham and Dodd (1940, p. 368) referred to this principle as the 'margin of safety'. This essay will explore the various methodologies, expand on the 'margin of safety' concept and discover…show more content…
Focussing on portfolio returns over time horizons of up to 5 years, the researchers offered strong empirical evidence of the effectiveness of the low P/BV strategy. Specifically average annual returns of 19.8% were reported. They were also able to surmise that there is ‘no support for the hypothesis' that value strategies are fundamentally riskier. Piotroski (2000) expanded on research into a low P/BV strategy by only choosing financially strong firms using nine fundamental financial signals. This refined investment strategy was shown to generate returns above value portfolios formed solely by the low P/BV screening method. He then improved on this approach by demonstrating a strategy of short selling the financially weaker low P/BV firms to produce over-all returns of 23% per annum. Piotroski also notes that initial signs of improvement in financial performance are at first ignored by market participants, with share price reactions only occurring during subsequent positive quarterly earnings announcements. Investors and analysts have a tendency to rely too heavily on the record of past earnings growth (La Porta et al. 1997). According to Lakonishok, Shleifer & Vishny (1994) popular strategies like 'extrapolating past earnings growth too far into the future' or 'assuming a trend in stock prices', 'overreacting to good or bad news', or 'simply equating a good investment with a well-run company

More about Why Are Value Investors Successful

Open Document