Deconstructing Value Investing: Valuation vs Cheapness
“Value Investing” is commonly misunderstood as buying companies at a discount to their intrinsic value. While that may have been true decades ago, today “Value Investing” predominantly consists of buying “low price to something” stocks. The “something” is a fundamental variable such as book value, earnings, and/or sales among others. However, such approaches do not necessarily identify undervalued stocks, only stocks that are “cheap” relative to the chosen fundamental variable.
An important, but unstudied issue for practitioners and academics to understand is:
· Do cheapness strategies independently generate excess returns? Or
· Are cheapness strategies simply correlated to intrinsic value, which generate excess returns?
Drawing from over 20 million real time valuations performed by Applied Finance since 1995, we explore this issue in depth.
3/24/2021 12:00 PM - 1:00 PM CST
Rafael Resendes is a founding partner of Applied Finance and co-manages the 5-star Applied Finance Select Fund. Mr. Resendes also serves on Applied Finance’s investment committee which oversees their Valuation 50 and Valuation Dividend SMA strategies, which since inception in 2004 and 2012 respectively are both ranked as top 5% strategies according to Zephyr.
For the past 30 years, Mr. Resendes has focused his research efforts on valuation, and how to make it relevant to equity portfolio construction. His research interests and activities focus on:
· Measuring corporate performance
· Modeling the effects of competition to avoid perpetuity assumptions in valuations
· Estimating corporate risk
Mr. Resendes co-founded The Applied Finance Group in 1995 with Daniel Obrycki, and they have also founded – Applied Finance Advisors and Applied Finance Capital Management.
Mr. Resendes earned his BS from UC Berkeley and an MBA from the University of Chicago.
Linked below are articles that you can take a look at:
The False Bargain of Passive Investing - Intro article on asset pricing models.
The Value Factor Illusion and Alpha – Confusing Correlation with Causality – intro to value investing vs cheapness investing.
Emotional Unease Creates Generational Wealth Opportunity - General valuation article
Economic Margin® White Paper – Timeless, very technical explanation of value based metrics.
Valuation Beta- Addressing Inadequacies of Book to Price with Intrinsic Value, Stewardship and Leverage.
The Valuation Edge™ - Free newsletter that provides ongoing market insights and observations.