Electronic copy available at: http://ssrn.com/abstract=2042657
Value Investing: Investing for Grown Ups?
Value investors generally characterize themselves as the grown ups in theinvestment world, unswayed by perceptions or momentum, and driven by fundamentals.While this may be true, at least in the abstract, there are at least three distinct strands of value investing. The first, passive value investing, is built around screening for stocksthat meet specific characteristics – low multiples of earnings or book value, high returnson projects and low risk – and can be traced back to Ben Graham’s books on securityanalysis. The second, contrarian investing, requires investing in companies that are downon their luck and in the market. The third, activist value investing, involves taking largepositions in poorly managed and low valued companies and making money from turningthem around. While value investing looks impressive on paper, the performance of valueinvestors, as a whole, is no better than that of less “sensible” investors who chose otherinvestment philosophies and strategies. We examine explanations for why "active" valueinvesting may not provide the promised payoffs.