3 ms·

Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earn

by mruts 7y ago

Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earnings), and P/B (price to book) can be used to identify/classify a growth company. Higher these ratios, the higher the stocks exposure to "growth". A value company is the exact opposite, a stock with low ratios. As you might have suspected, value has been clobbered in the last 10 years, and a bunch of Chicago school economists are pissing their pants (Fama, French, etc). V

SubiculumCode 7y ago
Could it be that we are better these days at more accurate valuation? (e.g. better analytics?)
- mruts 7y ago
  Certainly the proliferation of alternative data (online news sentiment, satellite imaginary, GPS location data, etc) has made finding those cheap harder to find because they are probably more fairly priced. Buffet has said that he switched his strategy from finding fair companies and a great price to great companies at a fair price, probably because of this increase of transparency. Also, there are fewer public companies today than in the past, due to consolidation or better liquidity in secondary (private) markets. If we ranked companies by P/E nowadays, and look at the cheapest stuff, it's often not worth buying. We're talking about the garbage companies that no longer can compete anymore. I think this is partially why value in underperforming. It's picking up all of this garbage that is actually fairly valued, and not cheap because people forgot about it. Funds like AQR do use value, but then often combine it with a factor that has a negative correlation with it, like momentum. Obviously you wouldn't want to combine value and growth (as they should have a close to -1 correlation, depending on how you define it), but adding a factor that has some negative correlation is very powerful. An example of using the combination of these two factors might work like this: I see a company that looks relatively cheap, but not cheap enough for a value strategy. I think find it has an upward momentum (the price is rising), though only moderately. Alone, neither of these signals would be strong enough for a buy. But together, I might infer that the company is turning itself around and things are going to get better.
dade_ 7y ago
Neither P/E or Book value are useful metrics for value investing. Please read security analysis...
- mruts 7y ago
  Would you prefer book to market? That's what Fama and French used. All of these ratios are related to the value factor, I didn't say you need/should use on or another.

by mruts 7y ago

SubiculumCode 7y ago

Could it be that we are better these days at more accurate valuation? (e.g. better analytics?)

mruts 7y ago
Certainly the proliferation of alternative data (online news sentiment, satellite imaginary, GPS location data, etc) has made finding those cheap harder to find because they are probably more fairly priced. Buffet has said that he switched his strategy from finding fair companies and a great price to great companies at a fair price, probably because of this increase of transparency. Also, there are fewer public companies today than in the past, due to consolidation or better liquidity in secondary (private) markets. If we ranked companies by P/E nowadays, and look at the cheapest stuff, it's often not worth buying. We're talking about the garbage companies that no longer can compete anymore. I think this is partially why value in underperforming. It's picking up all of this garbage that is actually fairly valued, and not cheap because people forgot about it. Funds like AQR do use value, but then often combine it with a factor that has a negative correlation with it, like momentum. Obviously you wouldn't want to combine value and growth (as they should have a close to -1 correlation, depending on how you define it), but adding a factor that has some negative correlation is very powerful. An example of using the combination of these two factors might work like this: I see a company that looks relatively cheap, but not cheap enough for a value strategy. I think find it has an upward momentum (the price is rising), though only moderately. Alone, neither of these signals would be strong enough for a buy. But together, I might infer that the company is turning itself around and things are going to get better.

dade_ 7y ago

Neither P/E or Book value are useful metrics for value investing. Please read security analysis...

mruts 7y ago
Would you prefer book to market? That's what Fama and French used. All of these ratios are related to the value factor, I didn't say you need/should use on or another.