Exploring the Theory and Practice of Value Investing for Higher Expected Returns
In the new market regime return predictability has gone for a hike, central banks are more activist than ever, and some valuations have become difficult to justify. It has therefore become more important than ever to understand what goes into a company’s valuation. Investors are under pressure to find returns but would be wise not to forgo fundamental analysis of key factors such as earnings, balance sheets, and cash flow statements.
A price as a signal of worth is a relatively simple concept. Responding to supply and demand, and without intervention or distortion, it will land at an equilibrium. The reality in any market is not so textbook of course and, for stock markets in particular, a price can obscure underlying causes for concern. How can investors know if a price represents the fair value of a company’s stock, is overinflated, or even offers a buying opportunity?
This Special Report explores the use of market prices and valuation theory to build systematic value equity strategies. The authors suggest not disputing a stock’s price, and instead using it to assess the expected returns of a company given its current price.