Ben Graham Would be Proud: Fundamental Analysis Works

Ben Graham Would be Proud: Fundamental Analysis Works

October 15, 2015 Value Investing Research
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(Last Updated On: January 18, 2017)

Here is an interesting working paper on the use of fundamental analysis in stock selection. The authors take a dynamic regression “machine learning-esque” approach to building out statistical fair-value Ben Graham  and David Dodd would be proud. Of course, this isn’t surprising if you’ve read our treatise on systematic value investing.

Fundamental Analysis Works

Stock prices cannot be the outcome of a rational efficient market if fundamental analysis based on public information is profitable. Our approach to fundamental analysis estimates the intrinsic fair values of stocks from the most common quarterly balance sheet and income statement items that were last reported in Compustat. Taking the view of a statistician with little knowledge of the theory of finance, we show that the most basic form of fundamental analysis yields trades with risk-adjusted returns of up to 9% per year. The trading strategy relies on convergence of market prices to their fair values. The greatest rate of convergence occurs in the month after the mispricing signal and subsequently decays to zero over the subsequent 28 months. Profits from trading are present for both large and small firms in economically significant magnitudes.

The punchline is summarized in the chart below:

  1. Balance sheet and income sheet items seem helpful in predicting future returns
  2. Turnover/activity is required to exploit the edge
fundamental indicators and signal decay
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


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Please remember that past performance is not an indicator of future results. Please read our full disclosures. 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.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Arely Castillo

    Alpha is a great factor on stock market trading. I always use this kinds of analyze for my personal trading. It’s a big part of my present trading strategy.

  • simon sung

    Wesley, interesting implementation of the concept. How do you go about defining ‘fair value’ in this exercise?
    I am also thinking why this fair value convergence hasn’t at least partially captured by the HML factor?

    Would be interesting to see the time series return of the HML factor vs this fair value convergence factor.

  • mellony spark

    Interesting… why, do you think, the resurgences in Alpha at the half-yearly marks? Is that “real” signal or an artifact?