Why Value Investing Works: A Theoretical Framework
Posted: 20 Mar 2019
Date Written: February 27, 2019
We hear a lot about value investing, an investing approach introduced by Benjamin Graham in the 1930s and championed by Warren Buffett, but we know very little about why it works so consistently. Academia has considered the consistent performance of value investors as a statistical anomaly, but given that it has persisted for more than eighty years, it warrants further investigation. In this paper, we tried to explain why value investing works. This paper presents a basic exposition of the core tenets of value investing. We make a clear distinction between value investing according to the Graham-Buffett paradigm and what is typically referred to in the academic literature as value investing. We then provide some reasons behind the recent underperformance of value portfolios and why value investing is likely to bounce back. Finally, we provide some behavioral explanations as to why investors find it so difficult to practice value investing consistently for long periods of time.
Keywords: Value Investing, Value, Growth, Index, Benjamin Graham, Warren Buffett
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