Fundamental Factors of Investing Part 2: What is the Value Factor?

Tyler and Craig review the “Value Factor” for our second installment of the fundamental factors of investing. In the investment industry there are various definitions of the value factor, but one description refers to the value factor as the factor that aims to capture excess returns from stocks that have low prices relative to their fundamental value. This is commonly tracked by price to book, price to earnings, dividends, and free cash flow. Historically it is the price to book valuation method that is most often cited for value investing. With low price to book being classified as a value stock. Price to book simply compares the company’s accounting book value or net assets relative to the market capitalization. 

We review how LVM uses the value factor in finding attractive investments including relative valuation methods such as price to earnings and absolute valuations such as the discounted cash flow method.  Craig reviews some common pitfalls investors come across when analyzing the value factor and discusses some of the historical return studies on value versus growth. Tyler reviews current market valuations and compares them to recent historical averages.