By |Published On: December 31st, 2014|Categories: Research Insights, Investor Education, Value Investing Research|

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: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia 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 firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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