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Bridge over ocean
1 April 2017 Financial Analysts Journal Volume 73, Issue 2

Facts about Formulaic Value Investing

  1. U-Wen Kok
  2. Jason Ribando
  3. Richard Sloan

The term “value investing” is increasingly being adopted by quantitative investment strategies that use ratios of common fundamental metrics (e.g., book value, earnings) to market price. A hallmark of such strategies is that they do not involve a comprehensive effort to determine the intrinsic value of the underlying securities. We document two facts about such strategies. First, there is little compelling evidence that these strategies deliver superior investment performance for US equities. Second, instead of identifying undervalued securities, these strategies systematically identify companies with temporarily inflated accounting numbers. We argue that these strategies should not be confused with value strategies that use a comprehensive approach in determining the intrinsic value of the underlying securities.

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