Monday, March 9, 2009

Value Investors Do Add Value

Those of you who have followed this blog from its start know that when Reyer and I started posting, we were interested in finding out whether empirical evidence shows that value investing does indeed outperform the market. While studies have shown that low P/E, low P/B and small-cap companies do tend to outperform the market, these anomalies are often explained away by backers of the Efficient Market Hypothesis (EMH) as being the result of high risk companies comprising a larger part of these outperforming groups.

Therefore, Reyer and I decided to conduct our own research into the matter. When the results looked promising, we subsequently teamed up with Professor George Athanassakos of the Richard Ivey School of Business to author a paper describing these results and the methodology. I'm pleased to announce that the paper is available here, under the heading:

Athanassakos, G., Barel, R., Karsan, S., 2009, “Do Value Investors Add Value? Searching for and Finding Value: Canadian Evidence 1999-2007”, January.

In it, we analyze financial data for low P/E and low P/B firms for each year in the preceding business cycle. We attempt to weed out the higher risk firms (due to business risk, financial risk, or a combination of the two), as value investors would normally do. We then observe that this process does indeed bear fruitful results, which the reader is encouraged to see for himself!

Many thanks to Reyer and George, whose contributions to the paper far outweighed mine!


Anonymous said...

this sounds very similar to what David Dreman wrote in Contrarian Value Investing. He looked at low PE, low P/B, low P/dividends and one other one I cant remember.

Reyer Barel said...

The study we did is quite different from what Dreman studied and to my understanding, unique in academia. Only our starting point had similarity to some of the other studies, since we filtered on low P/E, low P/B stocks.

However, we proceeded to do full company valuations on those low P/E, low P/B stocks in order to be further selective about which companies to rate a buy. The valuation techniques we used were the ones taught by Prof. Athanassakos and require a solid understanding of accounting, finance and business.

The purpose of the paper was to determine if a value premium exists for doing the full valuation vs. just the passive filters, and it does.


Reyer Barel said...

I should say, at least the results of the study we didn't lead us to reject the hypothesis that a value premium exists in doing the full valuation.