Berkshire Ruminations

Friday, January 09, 2009

Fundamental Value Investors: Characteristics and Performance

My good friend Wes Gray and I recently wrote an academic paper about value investors. Wes is a fellow coauthor mine over at the Empirical Finance Research blog. In our paper we analyze the investment recommendations on the website Value Investors Club, which in my opinion has some of the highest quality research accessible by the general public.

VIC started about nine years ago and today has more than 3000 very high quality research reports written and published by its members. Most, though not all, VIC members are professional money managers and membership in the club is limited and coveted. Wes and I wondered (from an academic point of view) if these people were actually able to beat the market given that, in an efficient market, we would expect them to not.

Our results indicate they do beat the market and can produce substantial alpha over one-year holding periods. They do best picking small cap stocks, but for horizons longer than one year they fail to beat the market. From this we conclude that there is more inefficiency in small caps and that the broader market recognizes these inefficiencies if you give it a year. This was an exciting finding for us since it logical and makes economic sense and also means we aren’t wasting our time reading VIC write-ups!

Anyway we posted the paper at SSRN yesterday and Guru Focus has already republished it themselves, although I am keeping an updated version on my personal webspace. We would love getting feedback on it as we are looking to improve it and prepare it for academic publication.


  • Does your paper take into consideration how many small caps picked up analyst coverage as they increased in value? The more analysts that cover a stock, the tougher it is to beat their earnings estimates.


    By Blogger thelex2007, at 15 January, 2009 22:40  

  • Mark,
    No it doesn't. But that is a great idea for a follow-on paper. Would be easy enough to do too since we have access to a database of analyst coverage. thanks for the outstanding suggestion!

    By Blogger Andy Kern, at 16 January, 2009 06:39  

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