A Framework for Value Investing

Richard G. Sloan, Seungmin Chee, Aydin Uysal
2013 Social Science Research Network  
This paper provides a framework for defining, formulating and evaluating value investment strategies. We define the relative value of an investment in terms of the prospective yield implied by the investment's current price and expected future cash flows. We develop an intuitive and parsimonious approach for estimating the prospective yield by aggregating expected earnings over a suitable forecast horizon. We then adapt our approach to construct a realized yield metric that can be used as a
more » ... direct alternative to realized security returns in evaluating value strategies. Finally, we show how our framework can be used to evaluate competing measures of value, construct improved measures of value, and attribute the returns to an investment strategy to value versus other sources. * We are grateful for the comments of workshop participants and the University of Pennsylvania, Bob Holthausen and Jim Ohlson. All errors and shortcomings are our own. 1 We discuss the relation of our approach to the implied cost of capital literature in more detail in the next section. Easton, P.D. and S. Monahan. 2005. An evaluation of accounting-based measures of expected returns.
doi:10.2139/ssrn.2310852 fatcat:2rhupy7vqze6bezoo7nosam5jy