Book Review: Quantitative Value

Finding high-quality stocks at cheap prices

 

Investors constantly look to pick quality stocks at cheap prices. Although this sounds simple, it’s difficult for investors to overcome their behavioural biases. Quantitative Value (Wiley; $85; pages 274 ), a book by two money managers and investment bloggers, Wesley Gray and Tobias Carlisle, discusses a quantitative methodology that utilises the approach used by successful value investors—Benjamin Graham, Warren Buffett and Joel Greenblatt, to create a system that can beat the overall market. Gray and Carlisle time tested the ‘Magic Formula’ described by value investing guru, Joel Greenblatt, in his book The Little Book that Still Beats the Market (reviewed in Moneylife). The Magic Formula focused on picking stocks based on return and valuation. The duo uses this formula and improves on it to create their quantitative model. 
 

Gray and Carlisle back-test the various valuation formulas like price-to-earnings (P/E), price-to-book (P/B), EBITDA/TEV (earnings before interest taxes depreciation and amortisation/total enterprise value), etc, and come to the conclusion that using the EBIT enterprise multiple (EBIT/TEV) as a valuation metric delivered the best results. One of the reasons why enterprise value has an edge is because market-capitalisation does not capture the effect debt has on return; enterprise value does. Joel Greenblatt also uses EBIT/TEV as the main valuation component in his Magic Formula. The book also covers how one can detect manipulators and outright frauds. Whatever the strategy, it is important to rigorously back-test it before drawing conclusions.

 

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