Sunday, rambling on: Nice article in today's NY Times by Mark Hulbert "Value Stocks Are Cheap and Not Especially Risky".
Talking about value stocks as a class and value as measured by price/book.
A quote from the article:
"Two finance professors, Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth, report that value stocks have beaten growth stocks by 3.7 percentage points a year on average from 1927 to the end of 2002. (Some researchers suspect that the difference may be smaller than this, but none argue that growth stocks have outperformed value stocks.)"
So by the "efficient market hypothesis" it "should be" (my quotes) that value stocks must be more risky than growth stocks because value stocks have that higher reward.
Hulbert now reports on an academic study where the authors (professors) looked at brokerage analysts and Value Line recommendations for stocks that the professors characterized as either growth or value. That these analysts didn't expect value stocks to outperform growth led the authors to surmise that they (the analysts) don't perceive value stocks as riskier than growth stocks. (If I am interpreting Hulbert's article correctly.) In other words, value beats growth and value is no more risky than growth.
Here is the abstract cited by Hulbert:
papers.ssrn.com.
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To me, this is all part of what I call The Big Investing Puzzle. And somehow it's wrapped within this SI thread. I have seen that we all have different "value" investing styles. And some seem to work well, and some particularly well at certain times. So we seem to be pretty careful about criticizing others' styles and performance. In this market, I will guess that not many of us - if any of us at all - can be doing so well we can comfortably assure ourselves of the superiority of our own method over anybody else's. (aside: at least we mostly all lean to that "better" 'value' side, rather than the other 'growth' side -g-)
For me it has been a goal to determine and utilize a "normative" method of investing. The Holy Grail for me being "The" normative -- not just "a" normative. By normative I mean "the proper" "the proven" "the correct" way of investing. One with academic support and empirical evidence (Real-world people using it to make money.). "A" method or "The" method which is able to be replicated by the average investor. (So, for example, on the Buffetology thread, I have occasionally suggested that since Warren Buffett is arguably a genius and unique in his work and the results he's obtained- he does not provide a normative way to invest because his results cannot (imo) be duplicated by the average investor.)
My point is (somewhere? -g-) that this Hulbert article shows that value beats growth, and that it's apparently well-known and not a surprise at all. And that "value" is defined at least in part by low price to book value. Yet for investors here who define themselves as value investors, there doesn't seem to be all that much emphasis being placed on book value. At least sometimes, more important considerations seem to be the use of stops, selecting or avoiding certain sectors, or limiting selections by market cap. or float. Buying up versus averaging down. Or sometimes emphasizing the determining of hidden values with a business or the seeking out of information not available to the general public. Not that these are not significant aspects to investing, but they do not seem to be closing in on 'a' or 'the' normative investment model that I'm seeking.
jmo; your view of The Big Investing Puzzle will differ. |
