Investment managers explain investment risk and styles through the illustration of style boxes, which makes it very easy for the retail investor to understand. So much so that style boxes have become the rule rather than a guide for even the most sophisticated strategy analyst. Today, it is an industry standard to define investment allocations and choose managers based on these boxes.
Although we would not steer investors away from using it as a guide, we do ask that you think outside the box as there are several issues with evaluating a manager solely based on where they fall in the nine-box paradigm.
First and foremost, the value/Core/Growth categories are defined as buying companies that trade at a low/high price to some fundamental variable, which is a measure of cheapness rather than a sophisticated valuation analysis (for more on Cheapness vs Value).
By buying growth or value buckets managers are pigeon-holing themselves and missing out on some of the most undervalued companies in the market simply because a company falls in the wrong box. For this reason, we encourage due-diligence analysts that evaluate our strategies to first focus on our unique approach to stock selection process and portfolio construction.
However, If you are going to put our strategies in a box, we fill the Valuation Box, buying the most undervalued companies in any given strategy benchmark.
The Gross Profitability Trap “But this time, it’s different!” More foolish words are rarely spoken in the financial industry, but they always seem to find their way back into the stock market lexicon. A firm’s [...more]
Valuation Driven™ Investing begins and ends with calculating the intrinsic value of every stock in a benchmark against which a portfolio is constructed, and comparing those values against traded prices. All of Applied Finance’s portfolios are Intrinsic Value Driven™, which differs significantly from a “value” perspective. To gain a better understanding into Applied Finance’s Intrinsic Value Driven™ approach, let’s first review traditional approaches to “Value”.
The traditional approaches to finding undervalued stocks use a simple ratio such as P/E or P/B, or a mix of them. These common approaches to value come with many shortcomings: […more]
Over the past couple months, worsening macro economic conditions, declining corporate profitability and a bottomless stock market have investors longing for the good old days when the economy delivered steady increases in GDP growth with [...more]
A corporate performance metric should provide insights into what a firm is worth. Most money managers utilize common earnings-based measures of corporate performance and value, which are suspect and easy to manipulate. Applied Finance developed the Economic Margin (EM) framework to remove the noise inherent in accounting data.
Traditional accounting-based valuation methods provide an incomplete view of a company’s value by not accounting for the investment needed to generate the earnings, cost of capital, inflation or cash flow. […more]
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