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Alternative Market Briefing

Great minds agree to disagree on the source of the Value Investing Premium

Wednesday, November 23, 2016

Matthias Knab, Opalesque:

Wesley Gray, CEO/CIO of Alpha Architect, writes on Harvest Exchange:

Bottom line: Great minds can disagree on the explanation, but nobody can dispute the empirical fact that value stocks have outperformed growth stocks by a wide margin over time. One would also be remiss in suggesting that exploiting the edge in value investing is easy — it’s highly volatile and needs to be pooled in a broader portfolio, ideally alongside momentum . 

Active investing sounds so easy. But we all know it is extremely difficult . Ask any deep value investor how they have felt over the past few years (although, they are feeling a lot better recently).

Certainly, any credible active investor should be able to answer 2 questions: 1) What is the source of their excess returns, or "active premium?" and 2) why is the premium is sustainable in the future?

These questions are non-trivial and academics have waged intellectual wars over these questions. The disagreements run deep among the greatest minds in finance.

Value Investing: The Greatest Academic Debate of All Time

In order to illustrate such a disagreement, we will examine how Eugene Fama, the father of market efficiency, thinks about the " value versus growth " debate, which will be familiar to our readers.

To keep things simple and in line with academic research practices, as per academic research convention, we consider value investing to be approximated roug......................

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