Value Investment Theory

Good Essays
Value investing is a fundamental analysis approach formulated by Graham and Dodd (1934) that focuses on companies whose share prices do not reflect their intrinsic worth. A value investor buys a stock if its price is low relative to some fundamental benchmarks such as earnings, cash, dividends, or book value (Bartov and Kim, 2004), and expects that the market will properly recognize the company’s value and adjust the stock price accordingly. Typically, value stocks have attributes such as low ratios of price-to-earnings (P/E) and price-to-cash flow (P/C), high book-to-market equity (B/M) or high dividend yields (Lakonishok et al., 1994; Fama and French, 1998). Growth investing, on the other hand, focuses on companies that feature signs of above-average…show more content…
Over the past decades, academics and practioners have generally come to agree that on average, value investing exhibits superior returns than growth investing (Chan and Lakonishok, 2004). Consistent with the Efficient Market Hypothesis, the explanation of this phenomenon given by Fama and French (1992) is that value stocks are fundamentally riskier, hence value investors earn higher returns as a compensation for bearing this extra risk, as risk and return are intimately related. However, as outlined in the excerpt of his book, Montier (2009) forcefully disagrees with this statement and attempts to disprove it. In this regard, this essay will examine whether value stocks carry more risk than growth stocks and analyse the reasons behind the former’s…show more content…
Nevertheless, Cooper and Gubellini (2007) examine the robustness of these findings, and provide evidence that whether the value premium is due to risk depends significantly on the chosen information variables used to classify good and bad market states. The authors contend that Petkova and Zhang’s results were subject to data mining and resolve this issue by using various additional conditioning variables, then conclude that the premium is not due to higher
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