Jack and I were reading a classic academic paper on value investing the other day: Contrarian Investment Extrapolation and Risk.
In this paper Lakonishok, Schleifer and Vishny–the 3 compadres that went on to form the behemoth investment firm LSV asset management–highlight an “obvious” empirical finding for all value investors out there.
The authors find that value stocks earn excess returns because investors over-extrapolate bad news and drive cheap stocks beyond fundamental value.
Jack and I update and expand the LSV results in our work “Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years”.
Our conclusion is no different than LSV–value kicks B–Double O–T–Y.
We all know value has worked historically. That isn’t new, but re-reading the old classics can be fun. For example, below is some text from page 1575 of the LSV text:
Microsoft Corporation (NASDAQ:MSFT) shows up as #3 on our quantitative value screen this month and Wal-Mart Stores, Inc. (NYSE:WMT) is not too far down the list!!!
Who is rearing to buy Microsoft Corporation (NASDAQ:MSFT) and Wal-Mart Stores, Inc. (NYSE:WMT) today?
Wesley R. Gray, Ph.D.Better known as “The Turnkey Analyst, Ph.D.”, Executive Managing Member, Empiritrage, LLC, Assistant Professor of Finance, Drexel University’s LeBow College of Business, United States Marine Corps, Captain, Ground Intelligence Officer, Published author; featured speaker, author, and lecturer at numerous venues (top-tier universities, museums, radio, and television), Ph.D./M.B.A. Finance, University of Chicago Booth School of Business, B.S. The Wharton School, University of Pennsylvania, magna cum laude Wes’ homepage is at http://welcometotheadventure.com/