Thursday, September 23, 2010

More evidence that value stocks beat glamour

From the Financial Post:

More evidence that value stocks beat glamour:
"In a study that may be published in the Journal of Behavioral Finance, it found that when value and glamour stocks failed to live up to earnings expectations, glamour stocks fell while prices for value stocks rose. A value stock is one that trades lower than its fundamentals would suggest. A bargain, in short.

This occurs even when business fundamentals deteriorated and appears to contradict academic explanations of what accounts for the so-called 'value premium,' the Institute, a unit of San Diegobased Brandes Investment Partners LP, found.

Academics maintain the excess returns from value stocks arise as compensation for the extra risk inherent in value stocks. But Brandes argues it's behavioural biases like overoptimism, overreaction and anchoring that account for the value premium.

We spoke of this last week in Behavioral Finance. We will dive a bit deeper into it tonight. Especially the increased risk story (short version of classic economist view: our models are not capturing risk correctly. Which MAY be true, but it is hard to imagine the degree of difference being explained strictly from a risk adjustment.)

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