Upload
bertina-griffin
View
218
Download
1
Tags:
Embed Size (px)
Citation preview
Yale School of Management
Overview of Equity Investing and Value Investing
William N. Goetzmann
Yale School of Management
Yale School of Management
Equity Investing
Motivation and BenefitsLong-Term PerformancePortfolio Approach to Performance
Yale School of Management
Why Equity Investing?
HistoryGrowthLiquidityDiversificationLegal rightsAligned interests
Yale School of Management
Three Centuries of Equities
0
1
10
100
1000
1700 1750 1800 1850 1900 1950 2000
U.K. Share Prices and Inflation1700 - 1987
333.32Equities
20.24Inflation
Yale School of Management
U.S Financial Markets
Time
Index ValuesCumulative Wealth
1370.95
4495.99
33.7326.4113.54
49.03
Dec1925
Dec1996
Dec1930
Dec1940
Dec1950
Dec1960
Dec1970
Dec1980
Dec1990
0.1
5000
0.1
1
10
100
1000
S&P 500 TR U.S. Small Stk TRU.S. LT Gvt TR MSCI EAFE TRU.S. 30 Day TBill TR U.S. LT Corp TR
Yale School of Management
Capital Market History 1926 - 1996
SP Small LTG EAFE TB LTCN Periods 852.00 852.00 852.00 324.00 852.00 852.00Geometric Mean (%)10.71 12.58 5.08 12.89 3.74 5.64Arithmetic Mean (%) 12.82 17.50 5.38 14.49 3.74 5.88Standard Deviation (%)22.13 35.65 8.08 19.30 0.95 7.20Highest Return (%) 42.56 73.46 15.23 17.87 1.35 13.76Lowest Return (%) -29.73 -36.74 -8.41 -14.38 -0.06 -8.90N Positive Periods 528 520 533 197 838 574N Negative Periods 322 331 318 127 13 276
Yale School of Management
The Equity Premium: 1970-1996
Risk (STD)
Return (AM)Risk vs. Return
0% 26% 3% 6% 9% 12% 15% 18% 21% 6%
17%
8%
10%
12%
14%
16%
S&P 500 TR
U.S. Small Stk TR
U.S. LT Gvt TR
MSCI EAFE TR
U.S. 30 Day TBill TR
U.S. LT Corp TR
Yale School of Management
Active vs. Passive Investing
Value added through informationUncertainty of informationMarket efficiencyDoes relative skill exist?
Yale School of Management
Do Winners Repeat?
Goetzmann and Ibbotson 1994 studyUsed 1976 - 1992 dataFound good & bad performance persistsFound that active managers beat the
Vanguard S&P 500 Index over the period
Yale School of Management
Evidence on Active Investing
Period 2Winners
Period 2Losers
Period 1Winners 62% 38%
Period 2Losers 37% 63%
Yale School of Management
Basics of Active Management
Market timingSecurity selectionDiversificationTaxes
Yale School of Management
Market Timing
Little evidence of widespread timing skill survivors appear to have done well market timing letters show no skill
The Dow theory: a momentum play some evidence of timing ability
Yale School of Management
The Dow Theory
Classic timing strategy of equity investment
Popularized by the Wall Street Journal from 1903 through 1929
A momentum strategy market follows trends Industrial and transportation sectors confirm high volume indicates move
Yale School of Management
The Dow Theory 1903 to 1929
BullMarket
BearMarket
BullForecast 74 56
BearForecast 18 36
Yale School of Management
Bull vs. Bear Calls
0.96
0.97
0.98
0.99
1
1.01
1.02
1.03
1.04
1.05
1.06
Pri
ce I
ndex
-40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 Days Around Editorialbuys neutrals sells
DJIA Around Editorials
Sells
Neutral
Buys
Yale School of Management
Security Selection
“Do Security Analyst’s Recommendations Have Value?” by Kent Womack JF (1996)
Studied broker recommendations over a decade Buy recommendations: 2% gain over days Sell recommendations: 9% loss over 6 months
Yale School of Management
Value Investing
Value vs. growth Quantitative approach to valuation modelsPerformance of value stocks Performance of value portfolios
Yale School of Management
Valuation of Perpetuity
V = C/(1+R) + C/(1+R)2 + … + C/(1+R)T
When T approaches infinity:
V = C/R
Yale School of Management
The Law of Value Investing
C
V R
C = Cash FlowV = Firm ValueR = Discount Rate
C = V*RV = C/RR = C/V
Yale School of Management
No growth in cash flowNo changing cash flowNo changing discount rate
Assumptions
Yale School of Management
Estimating Cash Flow
Dividends Yield = discount rate logic: Shareholders get dividends High yield firm is a value firm
Earnings E/P = discount rate logic: earnings measure increase is economic value
of the firm High Book to Market is a “Value Firm”
Yale School of Management
Example: EVA
EVA: Economic value-added net after-tax profit - capital*cost of capital C - V*R>0
means firm is undervalued, or:C is mis-estimatedR is mis-estimated
Yale School of Management
Evidence on Value Investing
Long-term tests of DCF modelRobert Shiller (Yale)
takes known future C/R and compare it to P finds P is more variable than C/R Market over-reacts
Yale School of Management
Under and Over-Valued Markets
5
10
15
20
25
30
35
P/E
Ratio
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990
P/E
V/E
V/E R fixed
S&P Price vs. ValueFrom Shiller "Market Volatilty"
Yale School of Management
Does P/E Forecast for R?
Yale School of Management
What About Growth?
Another Variable: G C grows at G
Uses analyst’s forecasts of growth
Growth firms are: Low yield Low earnings Low B/M
C
V R - G
Yale School of Management
Growth and Value
G = R - C/VSuppose you had a growth forecast: G*
Incremental return = G* - G
Yale School of Management
Estimating Growth
Ibbotson and Riepe, 1997How well do you do by perfectly
forecasting growth? Is growth sufficient?How right do you have to be?
Yale School of Management
Perfect Foresight Growth
1974-1990 Total High P/E&
Growth
LowP/E &Value
PerfectForesight
Growth21.1 18.1 32.7
S&P/Barra 13.3 15.05 18.18
Yale School of Management
Value vs. Growth Stocks
1975-1995Performance
GeometricReturn
ArithmeticReturn
StandardDeviation
S&P/BARRA Growth 13.98 15.46 18.51
S&P/BARRAValue
16.87 18.02 16.49
S&P 500 15.57 16.82 17.10
Yale School of Management
Value vs. Growth Managers
Mutual fund style analysis (Brown and Goetzmann, 1997)
Identified equity mutual fund stylesValue, Growth & Glamour managers
Yale School of Management
Glamour Managers
High growth and small stocks P/E ratio = 24.00 Market to book= 4.29 Five yr. earnings growth = 23.59 11 year risk-adjusted performance:
Performance = .51 % excess return per year
Yale School of Management
Value Managers
High value, small stocks P/E ratio = 20.2 Market to book = 3.21 Five yr. earnings growth = 9.92
Performance = 2.25 % excess return per year
Yale School of Management
How About the Discount Rate?
R = G + C/V How is it estimated?Asset pricing models
Yale School of Management
Summary of Equity Investing
Old evidence on timingNew evidence on selectionQuantitative model of value Value vs. growth stocksValue vs. growth managersDiscount rate