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Does Your Grandmother Read The Intelligent Investor? Study Says Maybe

By Rupert Hargreaves. Originally published at ValueWalk.

What are the typical profiles of Value and Growth Investors?

Over the years, there have been multiple academic studies that have produced data to support the conclusion that over the long-term value outperforms growth. Data from the likes of Benjamin Graham and David Dodd and Fama and French are commonly cited in work praising value’s long-term success, while the careers of value investors such as Warren Buffett, Seth Klarman, Walter Schloss and Howard Marks only support the conclusion further.

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Valuewalk, Ben Graham, Benjamin Graham, writing, reading, books, The Intelligent Investor, Value investing, value investors, Berkshire Hathaway, Warren Buffett, investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, margin of safety, activist investing, contrarian mindsets

However, the answer to the question of why value outperforms other styles remains elusive. Fama and French suggest the value premium may be compensation for systematic risks other than market portfolio return risk, while practical practitioners such as Warren Buffett suggest the premium exists due to the emotional biases of investors.

The extensive empirical literature on the value premium focuses primarily on stock returns and how they are related to macroeconomic and corporate variables. There is very little research that looks into the individual holdings of investors, and why these investors choose these holdings. A paper published in the Journal of Finance at the beginning of this year seeks to remedy this problem. The paper asks the key question “Who Are the Value and Growth Investors?”

Who Are the Value and Growth Investors?

By using a highly detailed administrative panel that contains the disaggregated holdings and socioeconomic characteristics of all Swedish residents between 1999 and 2007, the paper can establish the personality traits and make up of the average value investor.

According to the research paper, value investors are “substantially older, are more likely to be female, have higher financial and real estate wealth, and have lower leverage, income risk, and human capital than the average growth investor.” Meanwhile, the average growth investor tends to be male or an entrepreneur. More educated investors are also more likely to invest in growth stocks.

Further, the researchers found that over the life-cycle of investing, households tend to climb the “value ladder,” which essentially means that as the household ages, investors shift away from growth stocks towards value stocks as their “investment horizons short-term and their balance sheets and human capital role.”

value and growth investors

This change is economically significant as is apparently amounts to an average of half the value premium for the stock portfolio and a quarter of the premium for the risky portfolio, which also includes equity mutual funds.

Finally, as well as age and gender, according to this research paper, there’s a close link between the value investing and macroeconomic exposure of employment. As the report explains:

“We find that a single macroeconomic factor—per-capita national income growth— explains on average 88% of the time-series variation of per-capita income in any given two-digit SIC industry. Households employed in sectors with high exposure to the macroeconomic factor tend to select portfolios of stocks and funds with low value loadings. We obtain similar results when we use industry exposure to the value factor itself as a measure of systematic risk. Furthermore, we show that cross-sectoral differences in loadings are more pronounced for young households than for mature households, consistent with the intuition that human capital risk is primarily borne by the young. As a result, the value ladder is empirically steeper in more cyclical industries.”

Betermier, Sebastien and Calvet, Laurent E. and Sodini, Paolo, Who Are the Value and Growth Investors? (February 25, 2016). Journal of Finance, Forthcoming; Paris December 2014 Finance Meeting EUROFIDAI – AFFI Paper; HEC Paris Research Paper No. FIN-2014-1043. Available at SSRN: https://ssrn.com/abstract=2426823

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The post Does Your Grandmother Read The Intelligent Investor? Study Says Maybe appeared first on ValueWalk.

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