Building a Better Value Portfolio: Gerstein Fisher’s Multi-Factor® Value Strategy Overview
“In the short run, the market is a voting machine; but in the long run, it is a weighing machine.”
– Benjamin Graham
The core principle of value investing – targeting securities with a low market price relative to their underlying characteristics (whether measured by earnings, sales, or book value) has been around for decades. At Gerstein Fisher, our research into quantitative investment strategies and building portfolios using quantitative risk factors has been applied across multiple asset classes, including growth equities and global real estate. However, even in market segments such as value equities (value itself being a risk factor), we can take advantage of far more than a single security characteristic and build a value-oriented equity portfolio with additional targeted exposures to momentum, size, profitability, quality, and other factors to improve expected risk-adjusted return.
The Logic of Value Investing
Value investing is based on the core principle of investing in stocks whose prices are low relative to their fundamentals when compared to peers or to the overall market. Benjamin Graham, one of the fathers of value investing, compared the discount of the market price to the intrinsic value as a ‘margin of safety’ when he developed this concept with David Dodd in the 1920s. Professional investors who are proponents of value-oriented strategies, such as Warren Buffett, have made their careers on implementing a wide range of value-oriented strategies, and many benefited from taking advantage of the idea that a portfolio of relatively “cheaper” (but potentially riskier) securities relative to the overall market should outperform the market over a long time frame.
A Long-term Approach to Investing
From a practitioner point of view, value investing is usually a relatively slow and deliberate strategy for equity management that does not require frequent trading to manage. Traditionally, the information upon which a value portfolio is built is relatively stable – while the price (and therefore market value) fluctuates on a minute-to-minute basis, the book value and most other forms of valuation are usually adjusted quarterly, and often do not change much over any given three months. More recently, research has shown that certain methods of measuring value can be adjusted more frequently than a company’s quarterly balance sheets1, and as practitioners, Gerstein Fisher has tended to avoid any single measure of “value” as being correct – more data is better, in our view.