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Facts About Formulaic Value Investing

34 Pages Posted: 17 Jan 2016 Last revised: 27 May 2017

U-Wen Kok

RS Investments

Jason M Ribando

Arch Mortgage Insurance Company

Richard G. Sloan

University of California, Berkeley - Accounting Group; University of Southern California - Leventhal School of Accounting

Date Written: January 18, 2017

Abstract

The term ‘value investing’ is increasingly being adopted by quantitative investment strategies that use ratios of common fundamental metrics (e.g., book value, earnings) to market price. A hallmark of such strategies is that they do not involve a comprehensive effort to determine the intrinsic value of the underlying securities. We document two facts about such strategies. First, there is little compelling evidence that such strategies deliver superior investment performance for U.S. equities. Second, instead of identifying undervalued securities, these strategies systematically identify firms with temporarily inflated accounting numbers. We argue that these strategies should not be confused with value strategies that employ a comprehensive approach to determine the intrinsic value of the underlying securities.

Keywords: Value Investing, Value Premium, Book-to-Market, Accounting Distortions

JEL Classification: G12, G14, M41

Suggested Citation

Kok, U-Wen and Ribando, Jason M and Sloan, Richard G., Facts About Formulaic Value Investing (January 18, 2017). Financial Analysts Journal, Vol. 73, No. 2, 2017. Available at SSRN: https://ssrn.com/abstract=2716542 or http://dx.doi.org/10.2139/ssrn.2716542

U-Wen Kok

RS Investments ( email )

1 Bush Street
9th Floor
San Francisco, CA 94104
United States

HOME PAGE: http://www.rsinvestments.com

Jason Ribando

Arch Mortgage Insurance Company ( email )

3003 Oak Road
Walnut Creek, CA 94597
United States

Richard Sloan (Contact Author)

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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