34 Pages Posted: 17 Jan 2016 Last revised: 27 May 2017
Date Written: January 18, 2017
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: 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