Value investing is a simple idea in principle: buy something you think is more valuable than others realize and wait for its price to rise. It was first applied to equity investing by Benjamin Graham and David Dodd in their 1934 book Securities Analysis in which they described their method of buying stocks and bonds “which are selling well below the levels apparently justified by a careful analysis of the relevant facts.” It wasn’t until 1992 that Eugene Fama and Kenneth French published their now famous three-factor model in their seminal paper The Cross-Section of Expected Stock Return that introduced the High-Minus-Low (HML) factor that mathematically defined Value investing. At that time, Fama and French decided to use book-to-price (BtP) as the metric to measure each stock’s level of Value: stocks with higher BtP ratios were more of a value play since their calculated Value (book) was relatively higher than their market value (price). In other words, they were selling below the levels apparently justified by a careful analysis of the relevant facts.

In this paper, we show that BtP is no longer as good an identifier of Value stocks as one of it’s other underlying sub-factors, which better identifies stocks that provide the well-established Value premium. Download our research paper to find out which metric has become more relevant over the past several decades due to its increasing reliance on intangibles and R&D.

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