Consistent outperformance of the value investing paradigm : the performance of superinvestors and pragmatic investors
Soloviova, Natalia (2020)
Pro gradu -tutkielma
School of Business and Management, Kauppatieteet
Kaikki oikeudet pidätetään.
Julkaisun pysyvä osoite on
Value investing is a popular strategy among superinvestors such as Warren Buffett. This approach goes far beyond the strategy of investing in undervalued assets. Primarily, it takes into consideration companies’ fundamentals and looks for assets that are sold less than their intrinsic value. Therefore, the full name of this value strategy according to its broad definition is “intrinsic value business investing”. This broad definition is implied by the value investing strategy for the purpose of the master’s thesis. Despite the abundance of papers on evaluating the portfolio performance, including value assets portfolios, the portfolio performance evaluation of the most successful value investors in terms of the returns of their holdings is a rather innovative approach to studying this issue. The performance of twenty selected superinvestors was evaluated to verify that following a value investing strategy allows portfolio managers to outperform the benchmarks. The portfolio performance evaluation was performed with the Jensen’s alpha, Fama-French 3-factor model, Carhart’s 4-factor model, Fama-French 5-factor model, and GARCH(1,1) model with non-normal Student-t distribution. The regressions’ results supported by the Sharpe ratio values convincingly demonstrated that the superinvestors following the value investing paradigm in its broad definition had the superior ability to outperform the S&P500 Composite, S&P500 Value, Russell 2000, and Russell 2000 Value benchmarks. The hands-on algorithm to build a pragmatic portfolio under the value investing strategy was presented as well. The pragmatic portfolio composed of the superinvestors, which are the objects of the research in this thesis, was built to use it as another benchmark and to test how to implement the proposed algorithm in practice. Analysis of beta coefficients of multi-factor models revealed that the underlying value investing strategy of superinvestors did not exclude investing in growth stock or other investing styles. It was found that superinvestors’ portfolios were influenced by certain factors, such as size (SMB), value (HML) and momentum factors (MOM). The industry preferences of superinvestors were examined with the multivariate analysis of industry factors. The finance sector at the top of the preferences confirms the assumption that superinvestors prefer to invest in well-known industries.