quantitative value

A ‘Quantitative Value’ investment fund is nothing other than an algorithm managed fund. This means no human brain is involved in the security selection and portfolio selection. Consequently the investment decisions should be free of the human biases we suffer from.

Benjamin GrahamBenjamin Graham is widely considered to be to founding father of value investing. The seminal books Security Analysis (Graham & Dodd, 1934) and The Intelligent Investor (Graham, 1949) are considered to be must reads for every value investor. If we concentrate on the quantitative aspect in Ben Graham’s investment approach he also laid the foundations of quantitative value investing with his works. The quantitative aspect implies focusing on “earnings, dividends, assets and capital structure”. Investment decisions primarily need to be taken based on the historical financial statements. Unfortunately investors often make investment decisions largely based on speculative and subjective elements.

Security Analysis 1934, p34

Graham and Dodd, Security Analysis 1934, p34

We suggest that this psychological phenomenon is closely related to the dominant importance assumed in recent years by intangible factors of value, viz., good-will, management, expected earning power, etc. Such value factors, while undoubtedly real, are not susceptible to mathematical calculation; hence the standards by which they are measured are to a great extent arbitrary and can suffer the widest variations in accordance with the prevalent psychology. Graham and Dodd, 1934

With speculative elements Graham means the “intangible value factors” such as the assessment of management and forecasts of future pay-offs. Such “intangible value factors” are not objectively quantifiable; the valuation of these factors is extremely subjective and fluctuates widely with the optimism and pessimism on the stock market. In Security Analysis (1934) Graham refers for example to The Roaring Twenties or The New Era; from 1925 through 1929 the valuation of the US stock market substantially surpassed the historical average. More and more investors paid attention to future earnings expectations, expectations that invariably were raised in order to account for the absurd valuations.

In 1949 Benjamin Graham concluded that this fundamental quantitative approach has realized attractive returns in the past.

There is no guaranty that this fundamental quantitative approach will continue to show favourable results under the unknown conditions of the future. But, equally, there is no reason for pessimism on this score.Benjamin Graham, 1949

The quantitative approach also has evidently realized strong returns in the decades after 1949. In the ‘research library’ section of this website you can find reference to the important papers supporting this conclusion. More importantly, there is no sign of the quantitative approach being traded away through increased market efficiency either.