Value Investing: Investing for Grown Ups?

79 Pages Posted: 20 Apr 2012 Last revised: 27 Jun 2012

Aswath Damodaran

New York University - Stern School of Business

Date Written: April 14, 2012

Abstract

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.

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

JEL Classification: G10, G11, G12, G14

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

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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