Value investing strategies have had a long and storied history in financial markets. They are often dated back to the late 1920s and credited to Benjamin Graham and David Dodd, who advocated a form of value investing by buying profitable but undervalued assets. Indeed, value investing has been considered an important part of the equity investment landscape for the better part of the last century.
Despite all of this, there still remains much confusion about value investing. Some of this confusion is propagated by value’s opponents in an attempt to disparage the strategy, but others are often, intended or not, also perpetuated by those explicitly or implicitly advocating it.
The authors address a number of the more common notions, such as that value investing is only effective in concentrated portfolios, that it is a “passive” strategy, that it involves buying bad companies, implying it is a poor investment strategy, that it is a redundant factor in the face of newly emergent academic factors, and that it is best used — and in fact some claim only useful — in a long-only equity context. The authors also take on the commonly held belief that value is solely compensation for risk.
They conclude that the jury is still out as to whether the value premium exists because of risk or behavioral based explanations, and we believe the truth is likely a combination of the two. Further, they do not believe that the long term persistence of value, or any factor for that matter, is stronger if it is, in fact, due to risk-based explanations.
Bernstein Fabozzi/Jacobs Levy Outstanding Article Award
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.