Relevance of Value Investing in Developed Financial Markets

Abstract

This paper researches if Value Investing is an efficient approach as an investment management framework. The focus is on the large market capitalization stock market in the United States. The tested period is from the beginning of 2007 until the beginning of 2019. 6 portfolios based on the fundamental analysis were created and tested with the holding period of 5 years. The theory is based on the Efficient Market Hypothesis (EMH), Modern Portfolio Theory (MPT), and on the Value Investing Theory, which is one of the fundamental analysis techniques. According to the findings, it is impossible to accept the EMH, and the findings steer towards the Value Investing as being an approach with a potential to deliver positive Alpha. Furthermore, a distinction between Value Stocks and Value Investing is made, as often those two terms are used interchangeably. The performance analysis of Berkshire Hathaway steers towards the finding that it is much harder to deliver superior results based on the Value Investing approach when the investing is done on a very large scale, as in the 1980 class A stock price was less than 300 USD, in 1990 roughly 7.000 USD and in the beginning of 2019 311.000 USD (the numbers are comparable, since the class A stock was never split). Furthermore, the market capitalization in 2018 it exceeded 500 billion dollars. Economically and statistically significant diminishing Jensen’s Alpha suggests that the superior returns could be inversely related to the market size.