We are so proud of our first year at Riverview and have come to highly
value the effects of a positive culture in a school environment.
This would seem to closely model the tangible
book value effect, Tobin's q is replacement cost.
You then get to create four possible policy decisions and assign them
cultural value effects (Martial, Republic, Druidic, and Elemental).
It is worth noting that the outperformance of growth stocks over value ones in this analysis period appears to directly contradict
the value effect in the classic three - factor model.
If the market were adept at predicting cash flow growth, and if price - to - fundamentals ratios reflected the market's forecast, then
the value effect would disappear.
An alternative explanation: It could be that
the value effect is a behavioral phenomenon.
If that's the case, it could be that
the value effect will disappear as investors adjust their behavior.
Intrigued by
the value effect?
Still,
the value effect received its most famous academic endorsement in a 1992 paper by finance professors Eugene F. Fama and Kenneth R. French, who defined value stocks as those shares that trade at a low price relative to their book value («The Cross-Section of Expected Stock Returns,» Journal of Finance, Vol.
Within the stock market, investors can capture both the yield effect and
the value effect by purchasing higher - dividend stocks.
Was each estimate of the power of
the value effect subject to its own estimation error, overlooked by much of the quant community at their peril?
Was Basu engaged in inadvertent data mining, finding
the value effect after, and because of, a surge in both relative valuation and relative performance?
Did
the value effect lose, then gain, then lose statistical significance?
The value effect works on a much longer time horizon than momentum, so that investors using those models may be buying what the momentum models are selling.
Since then, academics and practitioners have documented
the value effect.
Winner of the 2012 William F. Sharpe Indexing Achievement Award for Institutional Investor Journals Paper of the Year: «Rebalancing and
the Value Effect»
He reports on how he has not been able to find a journal willing to publish research he co-authored with Nobel Laureate Harry Markowitz showing that a modest amount of error in stock prices would fully explain the famous Fama / French size and
value effects.
While there may be
a value effect in these results, the deciles were constructed on price performance alone.
AR: To that end: would investors looking to exploit
the value effect be better off investing in a fund (quantitatively run or index) as opposed to trying to do it on their own?