Posts by Wesley R. Gray, Ph.D.

The Quantitative Value Investing Philosophy

October 7, 2014

Benjamin Graham, who first established the idea of purchasing stocks at a discount to their intrinsic value more than 80 years ago, is known today as the father of value investing. Since Graham’s time, academic research has shown that low price to fundamentals stocks have historically outperformed the market. In the investing world, Graham’s most famous student, Warren Buffett, has inspired legions of investors to adopt the value philosophy. Despite the widespread knowledge that value investing generates higher returns over the long-haul, value-based strategies continue to outperform the market. How is this possible? The answer relates to a fundamental truth: human beings behave irrationally. We are influenced by an evolutionary history that preserved traits fitted for keeping us alive in the jungle, not for optimizing our portfolio decision-making ability. While we will never eliminate our subconscious biases, we can minimize their effects by employing quantitative tools.

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A Framework for Investment Manager Selection: Stick to the FACTS

September 16, 2014

Used car salesmen types are everywhere, especially in the asset management business. What defines the used car salesman? Used car salesmen are often focused on selling something—anything on their lots that has four wheels—rather than identifying the right vehicle for the client. The same holds true with the asset management business. Some asset management salesmen just want to sell something—anything, regardless of its suitability. Alpha Architect’s experience working with family offices in the dual role of consultant and investment manager has given us the opportunity to see a lot of indecipherable marketing materials and esoteric investment strategies over the years, neither of which appear to be in the best interest of the investor. We’ve always sought a simple framework that would facilitate a quick evaluation of any strategy that came through the door, but nothing really existed. Necessity is indeed the mother of invention: We developed our own framework for determining strategy selection and assessment. Our method is based on a few simple concepts, which should be clearly understood within the context of any investing approach, regardless of objective. In the end, choosing investment opportunities simply comes down to the FACTS.

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