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Value investing is an
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
paradigm In science and philosophy, a paradigm () is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitute legitimate contributions to a field. Etymology ''Paradigm'' comes f ...
that involves buying
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
that appear underpriced by some form of
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...
. The various forms of value investing derive from the investment philosophy first taught by
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
and
David Dodd David LeFevre Dodd (August 23, 1895 – September 18, 1988) was an American educator, financial analyst, author, economist, and investor. In his student years, Dodd was a ' and colleague of Benjamin Graham at Columbia Business School. The Wall ...
at
Columbia Business School Columbia Business School (CBS) is the business school of Columbia University, a private research university in New York City. Established in 1916, Columbia Business School is one of six Ivy League business schools and is one of the oldest bus ...
in 1928, and subsequently developed in their 1934 text ''
Security Analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or s ...
''. The early value opportunities identified by Graham and Dodd included stock in public companies trading at discounts to
book value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. T ...
or tangible book value, those with high
dividend yield The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant ...
s, and those having low price-to-earning multiples, or low
price-to-book ratio The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value (where ''book value'' is the value of all assets minus liabilities owned by a company). The calculation can be performed i ...
s. High-profile proponents of value investing, including
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float (the retained premiu ...
chairman
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the " margin of safety". For the last 25 years, under the influence of
Charlie Munger Charles Thomas Munger (born January 1, 1924) is an American billionaire investor, businessman, and former real estate attorney. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Mung ...
, Buffett expanded the value investing concept with a focus on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price. Hedge fund manager
Seth Klarman Seth Andrew Klarman (born May 21, 1957) is an American billionaire investor, hedge fund manager, and author. He is a proponent of value investing. He is the chief executive and portfolio manager of the Baupost Group, a Boston-based private inv ...
has described value investing as rooted in a rejection of the
efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
(EMH). While the EMH proposes that securities are accurately priced based on all available data, value investing proposes that some equities are not accurately priced. Graham never used the phrase ''value investing'' – the term was coined later to help describe his ideas and has resulted in significant misinterpretation of his principles, the foremost being that Graham simply recommended cheap stocks. The Heilbrunn Center at
Columbia Business School Columbia Business School (CBS) is the business school of Columbia University, a private research university in New York City. Established in 1916, Columbia Business School is one of six Ivy League business schools and is one of the oldest bus ...
is the current home of the Value Investing Program.


History

While managing the endowment of
King's College, Cambridge King's College is a constituent college of the University of Cambridge. Formally The King's College of Our Lady and Saint Nicholas in Cambridge, the college lies beside the River Cam and faces out onto King's Parade in the centre of the cit ...
starting in the 1920s, economist
John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
first attempted a strategy based on
market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...
, or predicting the movement of the finance market generally. When this method was unsuccessful, he turned to a strategy very similar to what would later be described as value investing. In 2017, Joel Tillinghast of
Fidelity Investments Fidelity Investments, commonly referred to as Fidelity, earlier as Fidelity Management & Research or FMR, is an American multinational financial services corporation based in Boston, Massachusetts. The company was established in 1946 and is o ...
wrote: :Instead of using big-picture economics, Keynes increasingly focused on a small number of companies that he knew very well. Rather than chasing
momentum In Newtonian mechanics, momentum (more specifically linear momentum or translational momentum) is the product of the mass and velocity of an object. It is a vector quantity, possessing a magnitude and a direction. If is an object's mass ...
, he bought undervalued stocks with generous
dividends A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
. ..Most were small and midsize companies in dull or out of favor industries, such as mining and autos in the midst of the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. Despite his rough start y timing markets Keynes beat the market averages by 6 percent a year over more than two decades.Joel Tillinghast (2017). Big Money Thinks Small: Biases, Blind Spots and Smarter Investing. Columbia University Press, Keynes used many similar terms and concepts as Graham and Dodd (''e.g.'' an emphasis on the intrinsic value of equities). But a review of his archives at King's College found no evidence of contact between Keynes and his American counterparts so he is believed to have developed his investing theories independently, and did not teach his concepts in classes or seminars as did Graham and Dodd. While Keynes was long recognized as a superior investor, the full details of his investing theories were not widely known until decades after his 1946 death. Furthermore, while there was "considerable overlap" of Keynes's ideas with those of Graham and Dodd, their respective ideas were not entirely congruent.


Benjamin Graham

Value investing was established by
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
and
David Dodd David LeFevre Dodd (August 23, 1895 – September 18, 1988) was an American educator, financial analyst, author, economist, and investor. In his student years, Dodd was a ' and colleague of Benjamin Graham at Columbia Business School. The Wall ...
, both professors at
Columbia Business School Columbia Business School (CBS) is the business school of Columbia University, a private research university in New York City. Established in 1916, Columbia Business School is one of six Ivy League business schools and is one of the oldest bus ...
and teachers of many famous investors. In Graham's book ''
The Intelligent Investor ''The Intelligent Investor'' by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been o ...
'', he advocated the important concept of margin of safety — first introduced in ''
Security Analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or s ...
'', a 1934 book he co-authored with David Dodd — which calls for an approach to investing that is focused on purchasing equities at prices less than their intrinsic values. In terms of picking or screening stocks, he recommended purchasing firms which have steady profits, are trading at low prices to book value, have low price-to-earnings (P/E) ratios, and which have relatively low debt.


Further evolution

However, the concept of value (as well as "book value") has evolved significantly since the 1970s.
Book value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. T ...
is most useful in industries where most assets are tangible. Intangible assets such as patents, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive
disruptive innovation In business theory, disruptive innovation is innovation that creates a new market and value network or enters at the bottom of an existing market and eventually displaces established market-leading firms, products, and alliances. The concept w ...
and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the
discounted cash flow The discounted cash flow (DCF) analysis is a method in finance of valuing a security, project, company, or asset using the concepts of the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate de ...
model (DCF), where the value of an asset is the sum of its future
cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
s, discounted back to the present.


Quantitative value investing

Quantitative value investing, also known as ''Systematic value investing'',Wesley R. Gray, Phd. and Tobias E. Carlisle, LLB. ''Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors''. Wiley Finance. 2013 is a form of value investing that analyzes fundamental data such as financial statement line items,
economic data Economic data are data describing an actual economy, past or present. These are typically found in time-series form, that is, covering more than one time period (say the monthly unemployment rate for the last five years) or in cross-sectional dat ...
, and
unstructured data Unstructured data (or unstructured information) is information that either does not have a pre-defined data model or is not organized in a pre-defined manner. Unstructured information is typically text-heavy, but may contain data such as dates, num ...
in a rigorous and systematic manner. Practitioners often employ quantitative applications such as statistical / empirical finance or
mathematical finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
,
behavioral finance Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...
,
natural language processing Natural language processing (NLP) is an interdisciplinary subfield of linguistics, computer science, and artificial intelligence concerned with the interactions between computers and human language, in particular how to program computers to proc ...
, and
machine learning Machine learning (ML) is a field of inquiry devoted to understanding and building methods that 'learn', that is, methods that leverage data to improve performance on some set of tasks. It is seen as a part of artificial intelligence. Machine ...
. Quantitative investment analysis can trace its origin back to
Security Analysis (book) ''Security Analysis'' is a book written by professors Benjamin Graham and David Dodd of Columbia Business School, which laid the intellectual foundation for what would later be called value investing. The first edition was published in 1934, s ...
by
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
and
David Dodd David LeFevre Dodd (August 23, 1895 – September 18, 1988) was an American educator, financial analyst, author, economist, and investor. In his student years, Dodd was a ' and colleague of Benjamin Graham at Columbia Business School. The Wall ...
in which the authors advocated detailed analysis of objective financial metrics of specific stocks. Quantitative investing replaces much of the ad-hoc financial analysis used by human fundamental investment analysts with a systematic framework designed and programmed by a person but largely executed by a computer in order to avoid
cognitive biases A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the objective input, m ...
that lead to inferior investment decisions. In an interview,
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
admitted that even by that time ad-hoc detailed financial analysis of single stocks was unlikely to produce good risk-adjusted returns. Instead, he advocated a rules-based approach focused on constructing a coherent portfolio based on a relatively limited set of objective fundamental financial factors. Joel Greenblatt's magic formula investing is a simple illustration of a quantitative value investing strategy. Many modern practitioners employ more sophisticated forms of quantitative analysis and evaluate numerous financial metrics as opposed to just two as in the "magic formula". James O'Shaughnessy's
What Works on Wall Street James Patrick O'Shaughnessy (born May 24, 1960) is an American investor and venture capitalist, currently serving as the CEO of O'Shaughnessy Ventures. He is the founder of O'Shaughnessy Asset Management, LLC (OSAM), an asset management firm th ...
is a classic guide to quantitative value investing, containing backtesting performance data of various quantitative value strategies and value factors based on compustat data from January 1927 until December 2009.


Value investing performance


Performance of value strategies

Value investing has proven to be a successful investment strategy. There are several ways to evaluate the success. One way is to examine the performance of simple value strategies, such as buying low
PE ratio Pe may refer to: Physical education Language * Pe language * Pe (Cyrillic), a letter (П) in the Cyrillic alphabet * Pe (Semitic letter), a letter (פ ,ف, etc.) in several Semitic alphabets ** Pe (Persian letter), a letter (پ) in the Arabic ...
stocks, low price-to-cash-flow ratio stocks, or low
price-to-book ratio The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value (where ''book value'' is the value of all assets minus liabilities owned by a company). The calculation can be performed i ...
stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole, not necessarily over short periods but when tracked over long periods. A review of 26 years of data (1990 to 2015) from US markets found that the over-performance of value investing was more pronounced in stocks for smaller and mid-size companies than for larger companies and recommended a "value tilt" with greater emphasis on value than growth investing in personal portfolios.


Performance of value investors

Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a
selection bias Selection bias is the bias introduced by the selection of individuals, groups, or data for analysis in such a way that proper randomization is not achieved, thereby failing to ensure that the sample obtained is representative of the population int ...
. A better way to investigate the performance of a group of value investors was suggested by
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
, in his May 17, 1984 speech that was published as
The Superinvestors of Graham-and-Doddsville "The Superinvestors of Graham-and-Doddsville" is an article by Warren Buffett promoting value investing, published in the Fall, 1984 issue of ''Hermes'', Columbia Business School magazine. It was based on a speech given on May 17, 1984, at the Col ...
. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies—value investing is, on average, successful in the long run. During about a 25-year period (1965–90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you thought that the world was flat."


Well-known value investors


The Graham-and-Dodd Disciples


Ben Graham's Students

Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote ''Security Analysis'', first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote ''
The Intelligent Investor ''The Intelligent Investor'' by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been o ...
'', a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn, Walter Schloss, and Charles Brandes went on to become successful investors in their own right. Irving Kahn was one of Graham's teaching assistants at Columbia University in the 1930s. He was a close friend and confidant of Graham's for decades and made research contributions to Graham's texts ''
Security Analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or s ...
'', '' Storage and Stability'', '' World Commodities and World Currencies'' and ''
The Intelligent Investor ''The Intelligent Investor'' by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been o ...
''. Kahn was a partner at various finance firms until 1978 when he and his sons, Thomas Graham Kahn and Alan Kahn, started the value investing firm, Kahn Brothers & Company. Irving Kahn remained chairman of the firm until his death at age 109. Walter Schloss was another Graham-and-Dodd disciple. Schloss never had a formal education. When he was 18, he started working as a runner on Wall Street. He then attended investment courses taught by Ben Graham at the New York Stock Exchange Institute, and eventually worked for Graham in the Graham-Newman Partnership. In 1955, he left Graham’s company and set up his own investment firm, which he ran for nearly 50 years. Walter Schloss was one of the investors Warren Buffett profiled in his famous Superinvestors of Graham-and-Doddsville article. Christopher H. Browne of Tweedy, Browne was well known for value investing. According to ''
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'', Tweedy, Browne was the favorite brokerage firm of
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
during his lifetime; also, the Tweedy, Browne Value Fund and Global Value Fund have both beat market averages since their inception in 1993. In 2006, Christopher H. Browne wrote '' The Little Book of Value Investing'' in order to teach ordinary investors how to value invest. Peter Cundill was a well-known Canadian value investor who followed the Graham teachings. His flagship Cundill Value Fund allowed Canadian investors access to fund management according to the strict principles of Graham and Dodd. Warren Buffett had indicated that Cundill had the credentials he's looking for in a chief investment officer.


Warren Buffett & Charlie Munger

Graham's most famous student, however, is Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float (the retained premiu ...
. Buffett was a strong advocate of Graham's approach and strongly credits his success back to his teachings. Another disciple,
Charlie Munger Charles Thomas Munger (born January 1, 1924) is an American billionaire investor, businessman, and former real estate attorney. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Mung ...
, who joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company, followed Graham's basic approach of buying assets below intrinsic value, but focused on companies with robust qualitative qualities, even if they weren't statistically cheap. This approach by Munger gradually influenced Buffett by reducing his emphasis on quantitatively cheap assets, and instead encouraged him to look for long-term sustainable competitive advantages in companies, even if they weren't quantitatively cheap relative to intrinsic value. Buffett is often quoted saying, "It's better to buy a great company at a fair price, than a fair company at a great price." Buffett is a particularly skilled investor because of his temperament. He has a famous quote stating "be greedy when others are fearful, and fearful when others are greedy." In essence, he updated the teachings of Graham to fit a style of investing that prioritizes fundamentally good businesses over those that are deemed cheap by statistical measures. He is further known for a talk he gave titled the Super Investors of Graham and Doddsville. The talk was an outward appreciation for the fundamentals that Benjamin Graham instilled in him.


Michael Burry

Dr. Michael Burry, the founder of Scion Capital, is another strong proponent of value investing. Burry is famous for being the first investor to recognize and profit from the impending
subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...
, as portrayed by
Christian Bale Christian Charles Philip Bale (born 30 January 1974) is an English actor. Known for his versatility and physical transformations for his roles, he has been a leading man in films of several genres. He has received various accolades, includin ...
in the movie
The Big Short ''The Big Short: Inside the Doomsday Machine'' is a nonfiction book by Michael Lewis about the build-up of the United States housing bubble during the 2000s. It was released on March 15, 2010, by W. W. Norton & Company. It spent 28 weeks on ' ...
. Burry has said on multiple occasions that his investment style is built upon
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
and
David Dodd David LeFevre Dodd (August 23, 1895 – September 18, 1988) was an American educator, financial analyst, author, economist, and investor. In his student years, Dodd was a ' and colleague of Benjamin Graham at Columbia Business School. The Wall ...
’s 1934 book ''
Security Analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or s ...
'': "All my stock picking is 100% based on the concept of a margin of safety."


Other Columbia Business School Value Investors

Columbia Business School has played a significant role in shaping the principles of the ''Value Investor'', with professors and students making their mark on history and on each other. Ben Graham’s book, ''The Intelligent Investor'', was Warren Buffett’s bible and he referred to it as "the greatest book on investing ever written.” A young Warren Buffett studied under Ben Graham, took his course and worked for his small investment firm, Graham Newman, from 1954 to 1956. Twenty years after Ben Graham, Roger Murray arrived and taught value investing to a young student named
Mario Gabelli Mario Joseph Gabelli (born June 19, 1942) is an American stock investor, investment advisor, and financial analyst. He is the founder, chairman, and CEO of Gabelli Asset Management Company Investors (Gamco Investors), an investment firm headqua ...
. About a decade or so later,
Bruce Greenwald Bruce Corman Norbert Greenwald (born August 15, 1946), is a professor at Columbia University's Graduate School of Business and an advisor at First Eagle Investment Management. He is, among others, the author of the books ''Value Investing: f ...
arrived and produced his own protégés, including Paul Sonkin—just as Ben Graham had Buffett as a protégé, and Roger Murray had Gabelli.


Mutual Series and Franklin Templeton Disciples

Mutual Series has a well-known reputation of producing top value managers and analysts in this modern era. This tradition stems from two individuals: Max Heine, founder of the well regarded value investment firm Mutual Shares fund in 1949 and his protégé legendary value investor Michael F. Price. Mutual Series was sold to
Franklin Templeton Investments Franklin Resources, Inc. is an American multinational holding company that, together with its subsidiaries, is referred to as Franklin Templeton; it is a global investment firm founded in New York City in 1947 as Franklin Distributors, Inc. It is ...
in 1996. The disciples of Heine and Price quietly practice value investing at some of the most successful investment firms in the country.
Franklin Templeton Investments Franklin Resources, Inc. is an American multinational holding company that, together with its subsidiaries, is referred to as Franklin Templeton; it is a global investment firm founded in New York City in 1947 as Franklin Distributors, Inc. It is ...
takes its name from Sir
John Templeton Sir John Marks Templeton (29 November 1912 – 8 July 2008) was an American-born British investor, banker, Asset management, fund manager, and philanthropist. In 1954, he entered the Mutual fund, mutual fund market and created the Franklin Temp ...
, another contrarian value oriented investor.
Seth Klarman Seth Andrew Klarman (born May 21, 1957) is an American billionaire investor, hedge fund manager, and author. He is a proponent of value investing. He is the chief executive and portfolio manager of the Baupost Group, a Boston-based private inv ...
, a Mutual Series alum, is the founder and president of The Baupost Group, a Boston-based private investment partnership, and author of ''Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor'', which since has become a value investing classic. Now out of print, ''Margin of Safety'' has sold on Amazon for $1,200 and eBay for $2,000.


Other Value Investors

Laurence Tisch, who led Loews Corporation with his brother, Robert Tisch, for more than half a century, also embraced value investing. Shortly after his death in 2003 at age 80, Fortune wrote, "Larry Tisch was the ultimate value investor. He was a brilliant contrarian: He saw value where other investors didn't -- and he was usually right." By 2012, Loews Corporation, which continues to follow the principles of value investing, had revenues of $14.6 billion and assets of more than $75 billion.
Michael Larson Paul Michael Larson (May 10, 1949 – February 16, 1999) was an American television game show contestant from Ohio who appeared on the CBS program '' Press Your Luck'' in 1984. Larson is notable for winning US$110,237 () in cash and prizes, at t ...
is the Chief Investment Officer of Cascade Investment, which is the investment vehicle for the
Bill & Melinda Gates Foundation The Bill & Melinda Gates Foundation (BMGF), a merging of the William H. Gates Foundation and the Gates Learning Foundation, is an American private foundation founded by Bill Gates and Melinda French Gates. Based in Seattle, Washington, it was ...
and the Gates personal fortune. Cascade is a diversified investment shop established in 1994 by Gates and Larson. Larson graduated from
Claremont McKenna College Claremont McKenna College (CMC) is a private liberal arts college in Claremont, California. It has a curricular emphasis on government, economics, public affairs, finance, and international relations. CMC is a member of the Claremont Colleges c ...
in 1980 and the Booth School of Business at the
University of Chicago The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
in 1981. Larson is a well known value investor but his specific investment and diversification strategies are not known. Larson has consistently outperformed the market since the establishment of Cascade and has rivaled or outperformed
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float (the retained premiu ...
's returns as well as other funds based on the value investing strategy. Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) because they are not as important and attempts to predict their movement are almost always futile. Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by Joel Greenblatt in his book on special-situation investment ''You Can Be a Stock Market Genius''. Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Charles de Vaulx and Jean-Marie Eveillard are well known global value managers. For a time, these two were paired up at the First Eagle Funds, compiling an enviable track record of risk-adjusted outperformance. For example, Morningstar designated them the 2001 "International Stock Manager of the Year" and de Vaulx earned second place from Morningstar for 2006. Eveillard is known for his Bloomberg appearances where he insists that securities investors never use margin or leverage. The point made is that margin should be considered the anathema of value investing, since a negative price move could prematurely force a sale. In contrast, a value investor must be able and willing to be patient for the rest of the market to recognize and correct whatever pricing issue created the momentary value. Eveillard correctly labels the use of margin or leverage as
speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many ...
, the opposite of value investing. Other notable value investors include: Mason Hawkins, Thomas Forester, Whitney Tilson,
Mohnish Pabrai Mohnish Pabrai is an Indian-American businessman, investor, and philanthropist. He was born in Bombay (Mumbai), India, on June 12, 1964. Career Pabrai worked with Tellabs between 1986–91, first in its high speed data networking group, and th ...
,
Li Lu Li Lu (born April 6, 1966) is a Chinese-born American value investor, businessman and philanthropist. He is the founder and chairman of Himalaya Capital Management. Prior to emigrating to America, he was one of the student leaders of the 198 ...
,
Guy Spier Guy Spier (born February 4, 1966) is a Zurich-based investor. He is the author of ''The Education of a Value Investor''. Spier is the manager of the Aquamarine Fund with $350 million in assets. He is well known for bidding US$650,100 with Mohni ...
and Tom Gayner who manages the investment portfolio of Markel Insurance. San Francisco investing firm
Dodge & Cox Dodge & Cox is an American mutual fund company, founded in 1930 by Van Duyn Dodge and E. Morris Cox, that provides professional investment management services. Background Dodge and Cox specializes in value investing and has been described as ...
, founded in 1931 and with one of the oldest US mutual funds still in existence as of 2019, emphasizes value investing.David B. Zenoff. The Soul of the Organization: How to Ignite Employee Engagement and Productivity at Every Level. Apress, Mar 1, 2014, p. 89


Criticism

Value stocks do not always beat growth stocks, as demonstrated in the late 1990s.Robert Huebscher
Burton Malkiel Talks the Random Walk
July 7, 2009.
Moreover, when value stocks perform well, it may not mean that the market is inefficient, though it may imply that value stocks are simply riskier and thus require greater returns. Furthermore, Foye and Mramor (2016) find that country-specific factors have a strong influence on measures of value (such as the book-to-market ratio) this leads them to conclude that the reasons why value stocks outperform are country-specific. An issue with buying shares in a
bear market A market trend is a perceived tendency of financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-fram ...
is that despite appearing undervalued at one time, prices can still drop along with the market. Conversely, an issue with not buying shares in a bull market is that despite appearing overvalued at one time, prices can still rise along with the market. Also, one of the biggest criticisms of price centric value investing is that an emphasis on low prices (and recently depressed prices) regularly misleads retail investors; because fundamentally low (and recently depressed) prices often represent a fundamentally sound difference (or change) in a company's relative financial health. To that end,
Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
has regularly emphasized that "it's far better to buy a wonderful company at a fair price, than to buy a fair company at a wonderful price." In 2000,
Stanford Stanford University, officially Leland Stanford Junior University, is a Private university, private research university in Stanford, California. The campus occupies , among the largest in the United States, and enrolls over 17,000 students. S ...
accounting professor Joseph Piotroski developed the
F-score In statistical analysis of binary classification, the F-score or F-measure is a measure of a test's accuracy. It is calculated from the precision and recall of the test, where the precision is the number of true positive results divided by the n ...
, which discriminates higher potential members within a class of value candidates. The F-score aims to discover additional value from signals in a firm's series of annual financial statements, after initial screening of static measures like book-to-market value. The F-score formula inputs financial statements and awards points for meeting predetermined criteria. Piotroski retrospectively analyzed a class of high book-to-market stocks in the period 1976-1996, and demonstrated that high F-score selections increased returns by 7.5% annually versus the class as a whole. The American Association of Individual Investors examined 56 screening methods in a retrospective analysis of the financial crisis of 2008, and found that only F-score produced positive results.


Over-Simplification of Value

The term "value investing" causes confusion because it suggests that it is a distinct strategy, as opposed to something that all investors (including growth investors) should do. In a 1992 letter to shareholders, Warren Buffett said, "We think the very term 'value investing' is redundant". In other words, there is no such thing as "non-value investing" because putting your money into assets that you believe are overvalued would be better described as speculation, conspicuous consumption, etc., but not ''investing''. Unfortunately, the term still exists, and therefore the quest for a distinct "value investing" strategy leads to over-simplification, both in practice and in theory. Firstly, various naive "value investing" schemes, promoted as simple, are grossly inaccurate because they completely ignore the value of growth, or even of earnings altogether. For example, many investors look only at dividend yield. Thus they would prefer a 5% dividend yield at a declining company over a modestly higher-priced company that earns twice as much, reinvests half of earnings to achieve 20% growth, pays out the rest in the form of buybacks (which is more tax efficient), and has huge cash reserves. These "dividend investors" tend to hit older companies with huge payrolls that are already highly indebted and behind technologically, and can least afford to deteriorate further. By consistently voting for increased debt, dividends, etc., these naive "value investors" (and the type of management they tend to appoint) serve to slow innovation, and to prevent the majority of the population from working at healthy businesses. Furthermore, the method of calculating the "intrinsic value" may not be well-defined. Some analysts believe that two investors can analyze the same information and reach different conclusions regarding the intrinsic value of the company, and that there is no systematic or standard way to value a stock. In other words, a value investing strategy can only be considered successful if it delivers excess returns after allowing for the risk involved, where risk may be defined in many different ways, including market risk, multi-factor models or idiosyncratic risk.


See also

*
Contrarian investing Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispric ...
*
Growth investing Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as ''growth investors'', invest in companies that exhibit signs of above-average growth, even if the share price appears expen ...
* Index investing * Low-volatility investing * Magic Formula investing * Momentum investing * Piotroski F-score *
Quality investing Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) ...
*
Value (economics) In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a speci ...
* Value averaging * Value premium


References


Further reading

* * * ''
The Theory of Investment Value John Burr Williams (November 27, 1900 – September 15, 1989) was an American economist, recognized as an important figure in the field of fundamental analysis, and for his analysis of stock prices as reflecting their " intrinsic value". He is ...
'' (1938), by
John Burr Williams John Burr Williams (November 27, 1900 – September 15, 1989) was an American economist, recognized as an important figure in the field of fundamental analysis, and for his analysis of stock prices as reflecting their " intrinsic value". He is ...
. * ''
The Intelligent Investor ''The Intelligent Investor'' by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing. The book provides strategies on how to successfully use value investing in the stock market. Historically, the book has been o ...
'' (1949), by
Benjamin Graham Benjamin Graham (; né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American economist, professor and investor. He is widely known as the "father of value investing", and wrote two of the founding texts in neoclassical inves ...
. * ''You Can Be a Stock Market Genius'' (1997), by Joel Greenblatt. . * ''Contrarian Investment Strategies: The Next Generation'' (1998), by
David Dreman David Dreman (born 1936) is an investor, who founded and is chairman of Dreman Value Management, an investment company. Dreman has published many scholarly articles and he has written four books. Dreman also writes a column for ''Forbes'' maga ...
. . * ''The Essays of Warren Buffett'' (2001), edited by Lawrence A. Cunningham. . * ''The Little Book That Beats the Market'' (2006), by Joel Greenblatt. . * ''The Little Book of Value Investing'' (2006), by Chris Browne. . * "The Rediscovered Benjamin Graham - selected writings of the wall street legend," by Janet Lowe. John Wiley & Sons * "Benjamin Graham on Value Investing," Janet Lowe, Dearborn * "Value Investing: From Graham to Buffett and Beyond" (2004), by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema * "Stocks and Exchange - the only Book you need" (2013), by Ladis Konecny, , value investing = chapter 2-5, 7, 8, 11-14 * "Modern Security Analysis: Understand Wall Street Fundamentals" (2013), by Fernando Diz and Martin J. Whitman, * ''The Most Important Thing Illuminated'' (2013), by Howard Marks


External links


An Introduction to Value InvestingThe concept of value investing
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