Facts and fictions of value investing

by Hansi Mehrotra

30th November 2015

The annual Berkshire Hathaway meeting, dubbed the “Woodstock of capitalism,” draws about 40,000 fans and shareholders of legendary value investor Warren Buffett, himself inspired by the late Benjamin Graham, the godfather of value investing.

But what does value investing really mean? The basic idea is that stocks that are trading at low prices to their fundamental or intrinsic values outperform expensive stocks in the long run. Despite being scrutinized by academics for more than 30 years, the strategy is still misunderstood, argue Clifford S. Asness, Andrea Frazzini, and Ronen Israel, of AQR Capital Management, and Tobias J. Moskowitz of Chicago Booth. Using publicly available data on US equities markets, the researchers find that value investing works most effectively with other strategies to reduce risk and increase portfolio returns.

Work cited

Clifford S. Asness, Andrea Frazzini, Ronen Israel, and Tobias J. Moskowitz, “Fact, Fiction, and Value Investing,” Working paper, April 2015.

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This article originally appeared in Capital Ideas, a publication of the University of Chicago (http://www.chicagobooth.edu/capideas)