Differences in Value
A cura di Justin Carbonneau, Validea Capital Management
A few weeks ago my partner, Jack Forehand (@practicalquant) wrote a piece titled “The Mechanics of Value Investing“. In it, he highlighted the various ways in which value investing can be defined. This topic was recently brought to light again in a recent tweet (see below) by Tom Psarofagis, ETF Analyst at Bloomberg. As Mr. Psarofagis points out, the underlying holdings in “value” ETFS can often be very different. As an investor, understanding why there can be such big differences between value portfolios can be a very important question to answer. To get at that answer, at least partially, I thought I’d look across the spectrum of value models run on Validea to see how value stock selection strategies can differ and what investors may be able to learn from this.
The “Why” Behind Value
As recent research has shown, value investing works over time partly because value stocks are riskier and partly because of the behavioral biases investors have. If you would like a substantive overview of these concepts and what is behind the value premium, Larry Swedroe’s article, Deep Dive into the Value Factor, is a great place to start.
Value stocks, and more specifically concentrated value portfolios, will have significant deviations from the market for periods of 1, 2 or even 3 years. We’ve been running focused model portfolios on the Validea site since 2003 and we’ve seen strong and sustained positive periods for value and very bad periods as well (we’re in one of those prolonged periods of underperformance of value now).
Validea’s Value Set
Of the 22 distinct strategies on Validea, many include value related investment criteria but the ten in the table below are the models that have the highest degree of emphasis on selecting stocks with value characteristics.
|Model Name||Guru||Source (book or academic paper)|
|Value Investor||Benjamin Graham||The Intelligent Investor|
|Contrarian Investor||David Dreman||Contrarian Investment Strategies|
|Book/Market Investor||Joseph Piotroski||Value Investing: The Use Of Historical Financial Statement Information|
|Private Equity Investor||Validea||Leveraged Small Value Equities|
|Value Composite Investor||James O’Shaughnessy||What Works on Wall Street (4th Ed)|
|Acquirer’s Multiple Investor||Tobias Carlisle||The Acquirer’s Multiple|
|Price/Sales Investor||Ken Fisher||Super Stocks|
|Low P/E Investor||John Neff||John Neff on Investing|
|Patient Investor||Warren Buffett||Buffettology|
The first six models in the table, from Graham through Tobias Carlisle’s Acquirer’s Multiple, would be considered the deepest value models. These five approaches seek out the cheapest, most beaten down stocks in the market based on metrics like Price/Earnings, Price/Book, The Acquirer’s Multiple (Enterprise Value / Operating Earnings) or other value factors.
The Fisher and Neff based models also have a key set of value criteria, but for a host of reasons they don’t pull in the absolute cheapest parts of the market as much as the other models. The Greenblatt Magic Formula model has a strong value component due to its earnings yield criteria, but quality (a sort on return on invested capital) carries just as much weight in the strategy The Buffett model is not looking at a value metric specifically as much as it is looking at the future return on a stock given the firm’s valuation and where earnings may be in the future.
The table below showcases the main value drivers within each of the models. No strategy uses the exact same criteria and as result no two models hold the exact same stocks. There is certainly overlap between value strategies, but no stock in our universe passes all of the models below with a score above 80%. To test this, I used Validea’s Guru Stock Screener and looked for stocks that pass at least 8 models with “Strong or Some” Interest. No stocks score that high across the full set of value models.
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