Value Investing: 2014 Value Stock Research Recap
The success and failure of value investing can be boiled down into two components:
- Buy Cheap Stuff
- Avoid Behavioral Bias
Buy Cheap Stuff
Ben Graham outlined the first point in his 1976 article published in Medical Economics:
Interviewer Question: Okay. SO, as of today, your formula says to consider only stocks with a P-E of seven or less. Is that all there is to it?
Graham Answer: ….you should select a portfolio of stocks that not only meet the P-E requirements but also are in companies with a satisfactory financial position.
Essentially, value investing comes down to buying cheap stocks that aren’t going bankrupt anytime soon. That is pretty simple.
Avoid Behavioral Bias
Value investing might be simple, but it is not easy, for the following reason–investor psychology.
Graham outlines the second point in the following quote:
“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
–Ben Graham, The Intelligent Investor
A Possible Solution?
So we know that buying cheap, high quality stuff has worked historically. We also know that the reason investors fail to be successful value investors is due to poor behavior.
We’ve proposed a solution to being a successful value investor in our piece on the “Quantitative Value Philosophy.”
Can the quantitative value philosophy, which systematically looks for cheap, high quality firms, but without the behavioral baggage, be successful? Unclear, because success or failure depends entirely on the investor. Our hope is that investors–empowered through education–can make better decisions in the future. And in the spirit of education, we recap some of the classic research pieces on simple value-investing approaches.
Recapping the Academic Research
P/E Recap Collections
- Quantitative Value Research: Low P/E
- Quantitative Value Research: Long-term P/E Ratio
- Quantitative Value Research: Weighted P/E Bracket
- Quantitative Value Research: E/P or Size Effect?
- Do Cash-Adjusted P/E Ratios Work? (2012)
Shiller P/E (“CAPE”)
- How does the Shiller P/E (“CAPE”) perform as a stock selection tool? (2013)
- The Shiller P/E Ratio (2011)
Timing with Value Metrics
- Quantitative Value Research: Cyclically-adjusted P/E (CAPE) Factor
- A Hands-on Lesson in Return Forecasting Models
- Is the Market Overvalued? Depends on How You Frame it…
- Can Market Valuations Be Effective Market-Timing Signals?
Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.