Value investors are vexed

Value's decade-long slump is testing contrarians' patience.

Ben Johnson, CFA 7 April, 2016 | 5:00PM
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The concept of value investing dates back at least as far as the 1920s, when Benjamin Graham and David Dodd first began teaching finance at Columbia University. The fundamental principles of value investing were later enshrined in the duo's classic Security Analysis, first published in 1934. The idea is painfully simple: Buy securities at prices below their intrinsic value and wait patiently for their market price to reflect their true worth.

The approach, so elegant in its simplicity, ultimately evolved into a religion of sorts. Many of Graham and Dodd's disciples, most notably Warren Buffett, rank among the most successful investors of all time. However, despite having basic intuition and legions of followers on their side, it wasn't until 1992 that Graham and Dodd's theory gained a rigorous empirical backbone. That was the year Eugene Fama and Kenneth French published their seminal work, The Cross-Section of Expected Stock Returns, which introduced the concept of the value premium.

The pair found that stocks trading at low price/book multiples tended to outperform those trading at high multiples over long time horizons. Fama and French showed that value was real, it was significant, and it could generate excess returns. However, their version of value was hatched in academia, a realm free of pesky issues like fees, trading costs and taxes--real-world problems that might affect investors looking to harness the value premium.

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About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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