I recently read and enjoyed Joel Greenblatt’s “The Big Secret for the Small Investor.” Although I have a more fundamental approach to selecting stocks, I have read Greeblatt’s previous books and I am a fan of the Magicdiligence approach to screening high earnings yield, high ROIC stocks with solid underlying businesses.
In this book, Greenblatt introduces the concept of value-weighted indexing. These are indexes that are continually rebalanced to weight most heavily those stocks that are priced at the largest discount based upon earnings yield. Historical analysis indicates that these indexes have produced superior results compared to equal-weighted indexing, which in turn have outperformed market-cap-weighted indexing (e.g., S&P). Greenblatt concludes that, since S&P indexing beats most professional investors already, small investors can beat the S&P 500 and the professionals by investing in value-weighted indices.
Greenblatt provides evidence to support his thesis. The value-indexed approach is additional evidence that stocks with a “margin of safety,” i.e., priced at a discount to intrinsic value, can produce above-average investment returns over the long term.
Newer empirical data from the Brandes Institute titled, “Value versus Glamour Revisited: Historical P/B Ratio Disparities and Subsequent Value Stock Outperformance,” provides additional evidence that using value-based methods of selecting stocks based upon “cheapness,” in this case low P/B value multiples, yields superiors returns. The Brandes Institute looked at a basket of nearly 2,700 stocks between 1968 and 2008 and divided them into deciles based upon the P/B ratio. The researchers found consistent outperformance of “value" stocks (decile 1) compared to glamor stocks (decile 10). Outperformance of the value group was usually in the 20-40% range. When the P/B disparity between the deciles was the greatest, the following five-year outperformance was at its greatest.
The article can be found here:
http://www.brandes.com/Institute/Documents/Value%20vs%20Glamour%20Revisited-PB%20Rations%20Non-US%20112009.pdf
I know that within the GuruFocus community I am preaching to the choir but it amazes me that there are so many different value-investing tactics that have yielded documented above-average results over the long term. There are different measures of cheapness, different approaches to bottom-up fundamental analysis, different asset-based valuations to look for cheapness and now value-indexing approaches.
There is empirical evidence that all of these strategies have shown superior investment returns when compared to the market indexes and to other investment philosophies (i.e., glamor stocks or technical approaches).
What this tells us is that the philosophical underpinnings of value investing — ensuring a margin of safety, having a long-term time-horizon, and buying stocks at a discount to intrinsic value — are critically important, and positive investment returns can be achieved through implementation of multiple value-oriented investing tactics.
I often wonder why this simple, tried and true approach is not more widely accepted in the retail investing community. I recently conducted a thorough fundamental analysis of Apple (AAPL, Financial), which can definitely be classified as a glamor stock despite modestly attractive valuations. I conducted the analysis from a conservative, value-investing standpoint.
Using a disciplined approach to valuation and providing a margin of safety, I recommended an approximate $290-306 acquisition price. The resulting comments were quite remarkable and, in fact, some of respondents acted as if I had insulted their religion! The biggest criticism was the perceived low price target to acquire the stock.
Some of the most colorful comments that I received are as follows:
Joking aside, these comments are informative for us value investors. We all know Warren Buffett’s baseball analogy when it comes to investing. We do not have to take a called strike and we can wait for the right fat-pitch.
I think Apple is a great company and, if it gets into my fat-pitch zone of about $300, I will start to buy. That there is such vehement opposition to this approach and that some investors' target price is their "ability to afford a few more shares” tells us about who is on the other side of the trade. At the end of the day, their glamor-based investing approach makes it easier for value investors to beat the markets. Therefore, when it comes to value vs. glamor, I will remain in the value camp.Also check out:
In this book, Greenblatt introduces the concept of value-weighted indexing. These are indexes that are continually rebalanced to weight most heavily those stocks that are priced at the largest discount based upon earnings yield. Historical analysis indicates that these indexes have produced superior results compared to equal-weighted indexing, which in turn have outperformed market-cap-weighted indexing (e.g., S&P). Greenblatt concludes that, since S&P indexing beats most professional investors already, small investors can beat the S&P 500 and the professionals by investing in value-weighted indices.
Greenblatt provides evidence to support his thesis. The value-indexed approach is additional evidence that stocks with a “margin of safety,” i.e., priced at a discount to intrinsic value, can produce above-average investment returns over the long term.
Newer empirical data from the Brandes Institute titled, “Value versus Glamour Revisited: Historical P/B Ratio Disparities and Subsequent Value Stock Outperformance,” provides additional evidence that using value-based methods of selecting stocks based upon “cheapness,” in this case low P/B value multiples, yields superiors returns. The Brandes Institute looked at a basket of nearly 2,700 stocks between 1968 and 2008 and divided them into deciles based upon the P/B ratio. The researchers found consistent outperformance of “value" stocks (decile 1) compared to glamor stocks (decile 10). Outperformance of the value group was usually in the 20-40% range. When the P/B disparity between the deciles was the greatest, the following five-year outperformance was at its greatest.
The article can be found here:
http://www.brandes.com/Institute/Documents/Value%20vs%20Glamour%20Revisited-PB%20Rations%20Non-US%20112009.pdf
I know that within the GuruFocus community I am preaching to the choir but it amazes me that there are so many different value-investing tactics that have yielded documented above-average results over the long term. There are different measures of cheapness, different approaches to bottom-up fundamental analysis, different asset-based valuations to look for cheapness and now value-indexing approaches.
There is empirical evidence that all of these strategies have shown superior investment returns when compared to the market indexes and to other investment philosophies (i.e., glamor stocks or technical approaches).
What this tells us is that the philosophical underpinnings of value investing — ensuring a margin of safety, having a long-term time-horizon, and buying stocks at a discount to intrinsic value — are critically important, and positive investment returns can be achieved through implementation of multiple value-oriented investing tactics.
I often wonder why this simple, tried and true approach is not more widely accepted in the retail investing community. I recently conducted a thorough fundamental analysis of Apple (AAPL, Financial), which can definitely be classified as a glamor stock despite modestly attractive valuations. I conducted the analysis from a conservative, value-investing standpoint.
Using a disciplined approach to valuation and providing a margin of safety, I recommended an approximate $290-306 acquisition price. The resulting comments were quite remarkable and, in fact, some of respondents acted as if I had insulted their religion! The biggest criticism was the perceived low price target to acquire the stock.
Some of the most colorful comments that I received are as follows:
- Traditional valuation methods are useless and What matters is the trend.
- Waiting for dips to purchase Apple is a fool's game. The only thing I wait for is my ability to afford a few more shares.
- Absurd analysis.
Joking aside, these comments are informative for us value investors. We all know Warren Buffett’s baseball analogy when it comes to investing. We do not have to take a called strike and we can wait for the right fat-pitch.
I think Apple is a great company and, if it gets into my fat-pitch zone of about $300, I will start to buy. That there is such vehement opposition to this approach and that some investors' target price is their "ability to afford a few more shares” tells us about who is on the other side of the trade. At the end of the day, their glamor-based investing approach makes it easier for value investors to beat the markets. Therefore, when it comes to value vs. glamor, I will remain in the value camp.Also check out:
