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Deconstructing Value Investing
Valuation vs Cheapness
Feb 24, 2021 03:00 PM
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Speaker: Rafael Resendes Co-Founder and CIO

“Value Investing” is commonly misunderstood as buying companies at a discount to their intrinsic value. While that may have been true decades ago, today “Value Investing” predominantly consists of buying “low price to something” stocks. The “something” is a fundamental variable such as book value, earnings, and/or sales among others. However, such approaches do not necessarily identify undervalued stocks, only stocks that are “cheap” relative to the chosen fundamental variable.

An important, but unstudied issue for practitioners and academics to understand is:

• Do cheapness strategies independently generate excess returns? Or

• Are cheapness strategies simply correlated to intrinsic value, which generate excess returns?

Drawing from over 20 million real time valuations performed by Applied Finance since 1995, we explore this issue in depth.

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Background Notes:

Over 20 years ago, Applied Finance developed the Economic Margin framework to measure a firm’s economic, rather than as-reported accounting performance, and directly link corporate performance to valuation.  Since launching its Valuation Driven™ database in 1995, Applied Finance has systematically performed and archived for research purposes over 20,000,000 individual company intrinsic value estimates.

Each valuation is performed utilizing Applied Finance’s proprietary research into: corporate performance, risk, growth and competition.

Applied Finance’s ongoing research database provides the foundation to link valuation research to portfolio construction and ongoing market research to expand our knowledge into how markets reward and punish firms.   To our knowledge, only Applied Finance has a live database of individual firm valuations constructed in the same manner with the same valuation framework for an extended period of time. This constitutes Applied Finance’s core Analytic Advantage.

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Lecture Feedback:

“Applied Finance takes a unique approach to identifying the intrinsic value of equity securities. Removing the noise from the earnings and focusing on understanding what a company’s economic margin is. The Deconstructing Value Investing presentation was extremely informative and the Pittsburgh CFA Society appreciated Rafael’s time and preparation.”
– Steven Miller, CFA®, CIPM | BNY Mellon | CFA Society of Pittsburgh Programs Chair

Applied Finance’s Deconstructing Value Investing presentation did a great job of demonstrating why the investment community should dig deeper into traditional valuation metrics and methodologies. The research reinforces the merit of identifying investments based on intrinsic value rather than cheapness based on standard valuation criteria. Overall, it presents an interesting subject matter backed by research that can be applied to everyone’s investment analysis.
-Paul Cusumano, CFA® | Morgan Stanley

“Applied Finance’s Deconstructing Value Investing presentation was a refreshing reminder of why traditional perpetuity based valuation models, while mathematically elegant and easy to describe, are primarily ineffective in constructing portfolios. In contrast Applied Finance’s economic margin methodology provides a theoretically sound, empirically vetted and actionable process for investors. As I listened to Rafael Resendes discuss the current state of “value” investing, I was reminded of a former colleague and Applied Finance client who often said “A vacation at the swamp is cheap but it is not a bargain”. ”
– John Toohey, CFA®  | Two Centuries Investments

“I really enjoyed the Deconstructing Value Investing presentation given by Applied Finance. It’s nice to have data to back up what one has observed empirically.”
– Mark Carlton, CFA® | Trademark Financial 

Applied Finance’s Deconstructing Value Investing presentation provided a valuable education on one way to define and value stocks.  It was thought provoking and insightful – time well-spent! 
– Sheila Berube, CFA | ​Independent Consultant | CFA Society of Minnesota Board of Directors, Secretary

“The Deconstructing Value Investing presentation clearly articulates a logical and reliable approach to calculating intrinsic value. Like their work, the Applied Finance team is first class.”
– Keith P. Duet, CFA® (CFA Society Louisiana – Past President) | Duet Asset Management 

“I recently attended the Deconstructing Value Investing lecture by Rafael Resendes of Applied Finance. His expertise, knowledge and ability to effectively link theoretical concepts to actionable investing is well worth the time and attention which is really a gift to any practitioner, especially a Chartered Analyst.

The mixed signals provided by talking heads and the market are easily discounted and confidence can be provided by an approach that is so steeped in real data and results.”
– Mark A. Fernandez, CFA® |R. M. Davis

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