The fundamentals of value investing - "Use knowledge to reduce uncertainty"

 

We have been so influenced by quantitative approaches or screening to value investing that we have forgotten how value is created through research. Many have become knee-jerk value investor who only think of it as a matter of sorting names by some value criteria like P/E ratios. It is just a factor. Reading an older book on value investing suggests that there has been on over-emphasis on single quant measures, See, Value Investing from Graham to Buffett and Beyond 

The authors refer to a foundational Graham and Dodd canon, "Use knowledge to reduce uncertainty". If you cannot or do not have the requisite knowledge, do not invest. 

Value investing is about understanding the company to find or unlock value relative to peer companies. The skill of unlocking knowledge is what creates an investment edge. It is about observing or seeing what may not be apparent to others through a closer analysis of accounting numbers, the market environment, and competition. 

Can this be done through single factor sorting? Perhaps as a start, but the current great divide between value and growth may have more to do with economic uncertainty and the changing dynamics of industries during a period of excess liquidity and pandemic than with the failure of quant measures. 

This is not an argument for dropping factor investing, but a reaffirming of the core principle of creating an investment edge - form methods to reduce uncertainty.