MBA programs around the world are still poisoning their students with Efficient Market Hypothesis (EMH) and Capital Asset Pricing Models (CAPM). Despite overwhelming evidence, the proponents of the elegant but wrong theory just would not give in. To them, market is efficient and one cannot have extra gain without assuming extra risk.
Here is a recent example:
In this interview, Princeton Professor Burton Malkiel, author of “A Random walk Down Wall Street”, tells unsophisticated viewers that even though market is not 100% efficient, it is still unbeatable.
“Telling someone that you cannot beat the market, is like telling a 6 year old Santa Clause does not exist”, he mocked the active money managers who tries to beat the market.
Do not buy Malkiel’s book! Do not be poisoned!
Warren Buffett actually had a better idea. He suggested the people belong to the Graham-and-Doddville should set up endowment positions in universities to make sure EMH and CAPM be taught extensively forever so we can disarm the competition before the races even start.
Buffett was joking. He meant for people to turn around and become value investors. They just wouldn’t listen.
As it turns out, value investing camp has its own serious research. Some have been long published but enjoy far less fame.
Marketing is the key; EMH and CAPM camp does a better job there. But it does not mean they are closer to the truth.
Value investing, characterized by buying and holding “value stocks” with low price-to-book, price-to-earnings, or price-to-cash flow, which have the high such ratios, could have yielded higher returns than “glamour strategies”, which buy stocks of the opposite characteristics.
“As early as 1977, academic studies used share price and earnings per share data to classify stocks into the value or glamour categories and to compare historical performance. Through the 1980s, 1990s, and 2000s, additional studies broadened the analysis to include book value and cash flow metrics. “ stated a recent study by Brandes Institute.
The Brandes Institute extended and expanded the research work done by Josef Lakonishok, Andrei Shleifer, and Robert Vishny (collectively, “LSV”) in 1994, and proved that value investing does add value.
Read the report:
This report originally appeared in Brandes Investment Partners website.
GuruFocus tracks Brandes Investment Partners’ stock portfolio under Charles Brandes.