Experience Stern | Faculty & Research

Value investors generally characterize themselves as the “grownups” in the investment world, unswayed by perceptions or momentum and driven by fundamentals, says NYU Stern Professor of Finance Aswath Damodaran. Not only is the characterization not that simple, he points out, but studies show it’s pretty hard to make value investing work.

Damodaran holds forth on the three main variations of value investing and what it takes to succeed in his [link]“Value Investing: Investing for Grownups?,” published on the Social Science Research Network in April.

The first type, passive value investing, is built around screening for stocks that meet specific characteristics – low multiples of earnings or book value, high returns on projects, and low-risk. This type can be traced back to Ben Graham’s books on security analysis.

The second, contrarian investing, requires investing in companies that are down on their luck and in the market. The third, activist value investing, involves taking large positions in poorly managed and low valued companies and making money from turning them around.

Damodaran analyzes the pros and cons of each style. He argues that the success of value investing legends lik Warren Buffett cannot be easily replicated, suggests strategies for contrarian investors, and parses the odds of success for individual activist investors versus activist hedge and private equity funds and institutional activists.

Regardless of the style, value investing requires self-confidence, tolerance for short-term volatility, a long view, and in many cases, deep pockets.

The bottom line, according to Damodaran: “While value investing looks impressive on paper, the performance of value investors, as a whole, is no better than that of less ‘sensible’ investors who chose other investment philosophies and strategies. Success at value investing is not easy to pull off, nor is it guaranteed.”