Product Code Database
Value investing is an investment investor profile that involves buying securities that appear underpriced by some form of fundamental analysis. Modern value investing derives from the investment philosophy taught by Benjamin Graham and David Dodd at Columbia Business School starting in 1928 and subsequently developed in their 1934 text Security Analysis.
The early value opportunities identified by Graham and Dodd included stock in public companies trading at discounts to book value or tangible book value, those with high and those having low PE ratio or low price-to-book ratios.
Proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, 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". Buffett further 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 has described value investing as rooted in a rejection of the efficient-market hypothesis (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 himself did not use the phrase value investing. The term was coined later to help describe his ideas. The term has also led to misinterpretation of his principles - most notably the notion that Graham simply recommended cheap stocks.
Hetty Green (1834-1916) was retrospectively described as "America's first value investor." She had a habit of buying unwanted assets at low prices, which she held, as she stated in 1905, "until they go up in and people are anxious to buy."Higgins, Mark. "The Story of Hetty Green: America's First Value Investor and Financial Grandmaster." Financial History. Museum of American Finance. (Fall 2022). link here
The investing firm Tweedy, Browne was founded in 1920 and has been described as "the oldest value investing firm on Wall Street".Charles B. Carlson (2010). The Little Book of Big Dividends. NY: John Wiley & Sons, ISBN 978-0-470-56799-9 Founder Forest Berwind "Bill" Tweedy initially focused on shares of smaller companies, often family owned, which traded in lower numbers and lower volume than stock for larger companies. This niche allowed Tweedy to buy stocks at a significant discount to estimated book value due to the limited options for sellers.Eli Rabinowich (February 12, 2004). Profiles in Investing: A Legacy of Value (interview with Christopher H. Browne, from the Graham & Doddsville Newsletter published by Columbia Business School) Tweedy and Benjamin Graham eventually became friends and worked out of the same New York City office building at 52 broadway.
Economist John Maynard Keynes is also recognized as an early value investor. While managing the endowment of King's College, Cambridge starting in the 1920s, Keynes first attempted a stock trading strategy based on market timing. When this method was unsuccessful, he turned to a strategy similar to value investing. In 2017, Joel Tillinghast of Fidelity Investments wrote:
Keynes used similar terms and concepts as Graham and Dodd ( e.g. an emphasis on the intrinsic value of equities). A review of his archives at King'
or http://dx.doi.org/10.2139/ssrn.2287262 There was "considerable overlap" of Keynes'
/ref>
Quantitative investment analysis can trace its origin back to Security Analysis by Benjamin Graham and David Dodd 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 that lead to inferior investment decisions.[3] , The Psychology of Human Misjudgement a speech by Charlie Munger In an interview, Benjamin Graham 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".Joel Greenblatt. The Little Book That Still Beats the Market. Wiley. 2010 James O'Shaughnessy's What Works on Wall Street 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.James O'Shaughnessy. What Works on Wall Street Fourth Edition. McGraw Hill. 2014
From 1965 to 1990 there was little published research and articles in leading journals on value investing.Joseph Nocera, The Heresy That Made Them Rich, The New York Times, October 29, 2005
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, Storage and Stability, World Commodities and World Currencies and The Intelligent Investor. 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, Tweedy, Browne was the favorite brokerage firm of Benjamin Graham 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.
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.
Seth Klarman, 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. The $700 Used Book. (2006, Aug. 7). BusinessWeek, Personal Finance section. Accessed 11-11-2008.
Michael Larson is the Chief Investment Officer of Cascade Investment, which is the investment vehicle for the Bill & Melinda Gates Foundation and the Gates personal fortune. Cascade is a diversified investment shop established in 1994 by Gates and Larson. Larson graduated from Claremont McKenna College in 1980 and the Booth School of Business at the University of Chicago 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'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, the opposite of value investing.
Other notable value investors include: Mason Hawkins, Thomas Forester, Whitney Tilson, Mohnish Pabrai, Li Lu, Guy Spier and Tom Gayner who manages the investment portfolio of Markel Insurance. San Francisco investing firm Dodge & Cox, 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. 89Andrew Daniels (2017) Dodge & Cox: Built to Last , Morningstar.com, accessed 18 Jan 2020
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 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 accounting professor Joseph Piotroski developed the F-score, 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 2008 financial crisis, and found that only F-score produced positive results.
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.
|
|
