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The Journal of Index Investing

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Asset Pricing: Trouble in Value Land

Peter Johansson and Ulrika Drax Johansson
The Journal of Beta Investment Strategies Winter 2020, 11 (3) 63-80; DOI: https://doi.org/10.3905/jii.2020.1.099
Peter Johansson
is co-founding partner at Valuex Research, LLC in Greenwich, CT
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Ulrika Drax Johansson
is co-founder and managing partner at Valuex Research, LLC in Greenwich, CT
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Abstract

Empirical literature on value and growth style investing has found value style investing to be a favorable long-term investment strategy. However, value investing has lost its edge in the past 10–12 years. As a result, the value premium has been proclaimed dead by institutional investors who argue common valuation multiples, such as price to book, are not valid proxies for valuation. In this article we argue that the academic definition of value investing is structurally flawed. Common valuation multiples do not indicate mispricing (cheap vs. expensive) but rather investors’ discount rate, which is a denominator metric in valuation. We discuss the practical application of a new definition of value, and provide both theoretical and empirical evidence that a disruptive growth stock valuation premium exists in equity markets. We argue that in the past decade the valuation premium in growth stocks has been the main driver of their outperformance.

TOPICS: Style investing, private equity, portfolio construction, equity portfolio management

Key Findings

  • • The academic definition of value investing has markedly underperformed for more than a decade.

  • • In this article we argue that the under performance of value investing is a result of the lack of a valid asset pricing model.

  • • We introduce a new definition of ‘value’ and a value premium that can be captured in all stocks, regardless whether stocks are classified as growth, value, large or small cap stocks.

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The Journal of Index Investing: 11 (3)
The Journal of Beta Investment Strategies
Vol. 11, Issue 3
Winter 2020
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Asset Pricing: Trouble in Value Land
Peter Johansson, Ulrika Drax Johansson
The Journal of Beta Investment Strategies Nov 2020, 11 (3) 63-80; DOI: 10.3905/jii.2020.1.099

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Asset Pricing: Trouble in Value Land
Peter Johansson, Ulrika Drax Johansson
The Journal of Beta Investment Strategies Nov 2020, 11 (3) 63-80; DOI: 10.3905/jii.2020.1.099
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  • Article
    • Abstract
    • GROWTH VERSUS VALUE
    • ECONOMIC SIZE, VALUATION MULTIPLES, AND ASSET PRICING
    • FUNDAMENTAL VALUE GENERATING FACTORS
    • THE NUMERATOR ISSUE
    • ASSET PRICING
    • THE GROWTH STOCK VALUE PREMIUM
    • FAIR VALUE VS. CONVENTIONAL VALUE
    • DISCUSSION
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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