Value investing – Research proposal

ABSTRACT

Since the publication of Benjamin Graham's "The Intelligent Investor," what is now
known as "value investing" has become one of the most highly accepted and followed
strategies of company selection. A number of stock valuation approaches and metrics are
presented in this project for consideration in determining whether a stock's current price
share represents a good "value" buy and whenever a company and its stock price need to
interpret the numbers in light of things like specific industry and general economic
conditions. Furthermore, competent stock research necessitates a forward-thinking
approach to historical assessments and current financial indicators, predicting how well a
firm will do in the future based on its existing finances, assets, liabilities, market position,
and development plans. We will learn about Graham's procedures for screening
companies in this research paper, which he suggested, described, and developed to help
even the most novice investors with their stock portfolio decisions. In fact, one of the
most appealing aspects of Graham's value investing method is that it is not unduly
sophisticated or convoluted, making it accessible to the typical investor.

INTRODUCTION

When it comes to value investing, there are essentially two options to take. On the one
hand, there is the qualitative approach to value investing, in which the management of a
company, the profit margin on its goods, and the market's development potential are all
factors to consider when making investment selections. A real value investor considers
not just the worth of a company's assets, but also its earnings power and growth
prospects. The financial literature often takes a quantitative approach to value investing,
simplifying the notion to a few financial measures that can be computed quickly for any
firm, independent of the industry in which they operate or the market's development
potential.
The technique of value investing is purchasing companies at a discount to their real
worth. People who invest in such companies are known as value investors, and they
actively search for companies that the market has undervalued. They think that the
market often overreacts to various news events, resulting in price swings that do not
represent the true long-term fundamentals of the business in question, therefore offering
investors with an investing opportunity. As a consequence, value investors may buy
companies for less than they would otherwise pay. Apart from a lengthy investment
horizon, value investing requires a contrarian mindset. The goal of this study is to look at
the performance of growth and value equities in foreign markets, with a particular
emphasis on the United States and India. It examines the performance of numerous
equities in both value and growth portfolios in further detail.

LITERATURE REVIEW

According to C Gunjan and N Prashant (2015), ‘value strategies,' which are based on a
cheap price compared to profits, dividends, book value, and other basic criteria, have
outperformed equivalent ‘growth strategies,' as well as the market. In their research, they
create stock portfolios based on price-earnings ratios and examine their ex post returns on
both absolute and risk-adjusted metrics to test this assumption in the Indian setting. They
sampled the market each quarter, for a total of 48 iterations, from October 2000 to
September 2013, and looked at portfolio returns for holding durations of up to five years.
In the Indian stock market, they discovered evidence of a statistically significant value
premium.

According to A Hedau's article, value investing refers to identifying a prospective stock

for investment based on the price-to-equity (P/E) ratio. His article attempted to test the
suitability of value investing among India's publicly traded construction and
infrastructure enterprises. The information is gathered during a nine-year period, from
April 2011 to March 2020. On the basis of the P/E and P/B ratios, the companies are
categorised as value and growth stocks. To compare the results from value and growth
portfolios, a total of 648 monthly portfolios are established and monthly rebalancing is
conducted. Sharpe and trenyor ratios are used to assess risk adjusted returns. The study's
findings yielded a mixed bag of outcomes. The study's results neither refute nor provide
clear evidence of the existence of value investing in the sample data over a period of
time. The reasons for value investing's failure are discussed in the paper's conclusion
section. The article represents the author's original work, and the portfolio was built using
novel P/E and PB ratio weighting criteria. The research will provide a better knowledge
of the best investment strategy for equities in India's building and infrastructure sectors.

In the first direct research of value investors, Athanassakos (2012) looked at whether
value investors contribute value beyond following a basic guideline of investing solely in
firms with low P/E and low P/B ratios. The author discovered that value investors
provide value in the sense that their three-step technique of identifying really cheap
companies outperformed the naïve strategy of just choosing firms with low P/E and low
P/B ratios by a large margin. Stock prices are influenced by human and institutional
behavior, resulting in the value premium. Individuals are capable of acting irrationally.
They extrapolate, are overconfident, overreact, and, most significantly, they herd. They
herd to keep their jobs safe. If the group loses and a portfolio manager is among the
losers, his career is safe since he suffered the same losses as everyone else; but, if he is
incorrect and others gain while he loses, his employment and reputation are jeopardized.

PROBLEM STATEMENT

Using the challenge as a starting point, we discovered that research has been done to see
whether value companies beat growth companies, but only on bigger markets, not smaller
ones. The majority of studies shows that value companies beat growth equities. On these
reasons, we are interested in seeing how the value and growth stock markets in the United
States and India are faring. As a result, we have come up with the following research
question:

Would a portfolio consisting of value stocks outperform a portfolio consisting of

growth stocks on United States of America and Indian markets?
OBJECTIVES AND AIMS

The goal of this study is to look at the performance of growth and value equities in
foreign markets, with a particular emphasis on the United States of America and India. It
examines the performance of numerous equities in both value and growth portfolios in
further detail. In this research article, we will look at whether value investing has
produced greater returns using a variety of approaches used by prior researchers to see
whether the findings acquired by others in the international capital markets are consistent.
This research will provide an up-to-date examination of the efficient markets hypothesis
and will determine if value investing is, in fact, a better technique.

The findings would have obvious implications for stock analysts as well as regular
investors who are prone to making predictions on foreign stock markets. As a result,
value stock overreaction is less likely to occur than growth stock overreaction. Finally,
the findings of this research study will be valuable to future and current academics
interested in worldwide comparisons of value and growth investments.

BACKGROUND AND SIGNIFICANCE

The portfolio's performance will be measured from 2000 to 2017, and will include
publicly traded firms in the United States of America as well as an overview of Indian
and international capital markets. Prior to reviewing the post-performance, the firms will
be organized into a portfolio. After that, the portfolio's post-performance will be assessed
using a variety of metrics to see whether there is a value premium in international
markets.

RESEARCH DESIGN AND METHODS

Graham's approach to value investing was aimed at creating a simple stock screening
method that the typical investor could use. Overall, he managed to keep things simple,
although traditional value investing is a bit more complicated than just repeating the
mantra, “Buy stocks with a price-to-book (P/B) ratio of less than 1.0.”

Using Graham's numerous criteria, investors may select which of the valuation indicators
or standards they think to be important and dependable for themselves. Some investors
still rely only on the P/B ratio to assess if a company is inexpensive. Others depend on
comparing the current share price to the company's NCAV extensively, if not solely.
Only purchase equities that pass all of Graham's proposed screening criteria if you are a
more careful, conservative investor.

All of the publications in this literature review compare the performance of a particular
stock market portfolio versus the market as a whole. The articles chosen all use the same
strategy for rebalancing the stock portfolio after a period of time. It is feasible to compare
the findings across nations and time periods using this method. It is usually fixed at one
year, although other writers examine the value premium over a two- or three-year holding
period.

The book-to-market ratio, which is the ratio between the market value of a stock and the
book value of the underlying business's assets, is used to choose value stocks in most
research. Others use additional metrics including price-to-earnings (P/E), cash flow yield
(CF), and dividend yield (DY). A lot of studies examine the impact of business size on
stock returns to see whether outperformance is due to size rather than the value indicator
itself.

This paper compiles a collection of publications on value investing in a number of global

stock markets. These papers were found by searching the EBSCO database for the terms
"value increase" and then publishing them in a scientific publication.

LIMITATIONS

While this study uses a broad range of financial data to establish the presence of a value
premium on foreign stock markets, there are certain constraints to consider. The
Worldscope database is one of them, however it is far from comprehensive. Prior to
2003, there were a significant number of samples with missing data. While the dividend
yield's influence has been examined, the sample rate is too low to accurately quantify the
indicator's value premium.

The influence of transaction costs is another component not included in this portfolio
study. While the hypothetical value investment techniques utilized in this study may
seem advantageous on paper, they may not be successful in practice. High transaction
costs are incurred while rebalancing a portfolio of multiple equities. By extending the
holding period from one to two years, an investor may save money on transaction
charges.

REFERENCES

 Athanassakos, G. (2012). Value investing vs. Modern portfolio theory. Journal of

Business & Financial Affairs, 1(2), 1-2.
 Beukes, A. (2011). Value investing: international comparison. International
Business & Economics Research Journal (IBER), 10(5), 1-10.
 Chee, S., Sloan, R., & Uysal, A. (2013). A framework for value investing.
Australian Journal of Management, 38(3), 599-633.
 Chhaya, G., & Nigam, P. (2015). Value investing with price-earnings ratio in
India. IUP Journal of Applied Finance, 21(2), 34
 Hedau, A. (2020). Value Investing: Evidence From Listed Construction And
Infrastucture Sector Companies In India. Romanian Economic and Business
Review, 15(4), 104-114.
 Yan, Z., & Zhao, Y. (2010). New evidence on value investing in emerging equity
markets. Applied financial economics, 20(24), 1839-1849.