Visit any CBD and you’ll notice the continual rise of the discount store, I can only attribute it to people wanting more for their money, or possibly the same for less.
Are they getting it? Maybe it’s an illusion and they’re only buying junk, convinced it’s worth the purchase because of the low price!
That’s another debate, but one thing is clear – these people are looking for value and just like in shopping, value plays an important part in investing.
In 1992, Eugene Fama and Kenneth French published a paper called “The Cross-Section of Expected Stock Returns”; the paper, using data stretching back to 1926, showed that one of the three factors influencing share returns was the value effect.
Value is determined by finding companies with high book to market ratios, put simply – comparing the net assets of the company vs. how the market prices the company’s shares.
Unlike the discount store, there’s no illusion on what is being bought.
If a company’s share price drops it may appear to become a value proposition, but adopting an exclusion process filters out companies facing imminent failure.
This avoids the possibility of buying a Babcock & Brown or ABC Learning, which appear to offer value, but are on the road to ruin, regardless of how appealing their share price seems.
When we talk returns, from 1980-2009 the annualised compound return of the Australian value index is 17.55% vs. 12.31% for the ASX 500 index.
These extra returns are compensation for the risk taken, but Fama & French have proven the consistent performance of value shares over history.
Companies that move out of value range are excluded, being replaced with new value propositions; this is how value funds continue their strong growth.
While I’m not convinced on the value effect of shopping at the discount store, the value effect has historically proven successful for share market investors.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial advisor. We think we’re Tasmania’s best financial adviser and
