Value Investing: Investing for Grown Ups?

Aswath Damodaran

New York University - Stern School of Business

April 14, 2012

Value investors generally characterize themselves as the grown ups in the investment world, unswayed by perceptions or momentum, and driven by fundamentals. While this may be true, at least in the abstract, there are at least three distinct strands of value investing. The first, passive value investing, is built around screening for stocks that meet specific characteristics – low multiples of earnings or book value, high returns on projects and low risk – and can be traced back to Ben Graham’s books on security analysis. The second, contrarian investing, requires investing in companies that are down on their luck and in the market. The third, activist value investing, involves taking large positions in poorly managed and low valued companies and making money from turning them around. While value investing looks impressive on paper, the performance of value investors, as a whole, is no better than that of less “sensible” investors who chose other investment philosophies and strategies. We examine explanations for why "active" value investing may not provide the promised payoffs.

Number of Pages in PDF File: 79

Keywords: value investing, PE ratios, Price to book, activist value investing, private equity

JEL Classification: G10, G11, G12, G14

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Date posted: April 20, 2012 ; Last revised: June 27, 2012

Suggested Citation

Damodaran, Aswath, Value Investing: Investing for Grown Ups? (April 14, 2012). Available at SSRN: https://ssrn.com/abstract=2042657 or http://dx.doi.org/10.2139/ssrn.2042657

Contact Information

Aswath Damodaran (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.damodaran.com
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