WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGAs Table 8 indicates, the low price-to-book value stocks outperformed the high price-tobookvalue stocks in 16 of the 22 years, or 73% of the time. For three-year holding periods,the low price-to-book companies beat high price-to-book companies in 18 out of the 20three-year periods. For five-year holding periods, the low price-to-book value companieswere a better choice than the high price-to-book value companies every time.Are Low Price-to-Book Value Stocks' Higher Returns, as Compared to HighPrice-to-Book Value Stocks, due to Higher Risk?In an attempt to examine whether the higher returns of low price-to-book value stockswere due to greater risk, Professors Lakonishok, Vishny and Shleifer measured monthlyinvestment returns in relation to price as a percentage of book value between April 30,1968 and April 30, 1990 in the 25 worst months for the stock market, and the remaining88 months in which the stock market declined. In addition, monthly returns were examinedin the 25 best months for the stock market and the 122 remaining months inwhich the stock market increased. The results of this study are shown below in Table 9.Table 9:Average One-Month Investment Returns in Relation to Price as aPercentage of Book Value in the Worst and Best Stock Market Months,April 1968 – April 1990Price as a Percentage of Book Value Decile(Highest Price as a Percentage of Book Value) (Lowest Price as a Percentage of Book Value)1 2 3 4 5 6 7 8 9 10Worst 25 months in thestock market(11.2%) (11.0%) (10.4%) (10.0%) (9.7%) (9.1%) (9.3%) (9.2%) (9.8%) (10.2%)Next worst 88 months inthe stock market when the (2.9) (2.8) (2.6) (2.5) (2.3) (2.0) (2.1) (2.0) (1.8) (2.2)stock market declinedBest 25 months in thestock market11.4 11.4 11.9 11.3 11.2 11.3 11.8 12.6 13.3 14.8Next best 122 months inthe stock market when thestock market increased3.8 4.0 3.9 3.7 3.6 3.7 3.8 3.7 3.8 3.9As Table 9 indicates, the low price-to-book value stocks outperformed the high price-tobookvalue stocks in the market's worst 25 months, and in the other 88 months when themarket declined. In the best 25 months for the market, the low price-to-book value stocksalso beat the high price-to-book value stocks. The monthly results were similar for bothhigh and low price-to-book value stocks in the remaining 122 months when the stockmarket increased.The professors conclude,Overall, the value strategy [low price-to-book value] appears to do somewhat betterthan the glamour strategy [high price-to-book value] in all states and significantlybetter in some states. If anything, the superior performance of the value strategy is11