Investment Planning Knowledge Circle: Deconstructing Value Investing - Valuation vs. Cheapness

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“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 an 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.

Chris Austin

Partner

Applied Finance

Chris has over 17 years of experience working with financial advisors, bank trust departments, and RIA firms. Throughout this time, Chris has worked closely with small RIA’s and advisors consisting of 1 to 3 professionals, to nationwide brokers with thousands of advisors. Chris started with Applied Finance in 2003, and is an expert in applying the firm’s Economic Margin® concepts to help advisors construct and implement valuation based portfolio strategies for their clients. He has spoken at various conferences, trade groups, and company training functions.