Value Investing: 2014 Value Stock Research Recap

/Value Investing: 2014 Value Stock Research Recap

Value Investing: 2014 Value Stock Research Recap

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(Last Updated On: August 18, 2017)

The success and failure of value investing can be boiled down into two components:

  • Buy Cheap Stuff
  • Avoid Behavioral Bias

Buy Cheap Stuff

Ben Graham outlined the first point in his 1976 article published in Medical Economics:

Interviewer Question: Okay. SO, as of today, your formula says to consider only stocks with a P-E of seven or less. Is that all there is to it?

Graham Answer: ….you should select a portfolio of stocks that not only meet the P-E requirements but also are in companies with a satisfactory financial position.

Essentially, value investing comes down to buying cheap stocks that aren’t going bankrupt anytime soon. That is pretty simple.

Avoid Behavioral Bias

Value investing might be simple, but it is not easy, for the following reason–investor psychology.

Graham outlines the second point in the following quote:

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

–Ben Graham, The Intelligent Investor

A Possible Solution?

So we know that buying cheap, high quality stuff has worked historically. We also know that the reason investors fail to be successful value investors is due to poor behavior.

We’ve proposed a solution to being a successful value investor in our piece on the “Quantitative Value Philosophy.”

Can the quantitative value philosophy, which systematically looks for cheap, high quality firms, but without the behavioral baggage, be successful? Unclear, because success or failure depends entirely on the investor. Our hope is that investors–empowered through education–can make better decisions in the future. And in the spirit of education, we recap some of the classic research pieces on simple value-investing approaches.

Recapping the Academic Research

P/E Recap Collections

Shiller P/E (“CAPE”)

Timing with Value Metrics


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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • Michael Milburn

    Wes, Just wanted to say I really enjoyed reading the blog this year and learned alot. This has been, for me, the year of learning about both quant approaches behavioral finance, and the studies and ideas you discuss here have been excellent for thought.

    Anyhow – thanks for sharing your thinking on investing, and best wishes for 2015.

  • No problem, Michael. Our mission is to empower investors through education!

  • Trevor Allinson

    Wesley, Thanks for offering some unique viewpoints on a lot of very interesting topics. I have spent a lot of time reading your blog and can truly say that a lot of your findings are helping to shape my thought processes as I get started on a career in the industry. A couple of topics that I have not come across yet and am curious about: Have you ever done/reviewed any research on stock performance based on relative valuation. Relative being to one’s self, industry, or benchmark. I also haven’t seen anything on performance based on earnings estimate revisions. Have you guys looked at that? Thanks again!

  • Trevor,
    Check out papers by anderson and brooks. Here is an example: https://alphaarchitect.com//2014/11/10/quantitative-value-research-long-term-pe-ratio-106/
    These guys have studied everything imaginable when it comes to the questions you’ve mentioned.
    http://www-users.york.ac.uk/~ka536/
    The earnings estimate revisions research is also very robust. just “google it” in ssrn or google scholar.