Lakonishok et al. (1994)

Reference

Contrarian Investment, Extrapolation, and Risk^aaa

Joseph Lakonishok, Andrei Shleifer and Robert W. Vishny

The Journal of Finance, Volume 49, Issue 5 (Dec., 1994), 1541-1578.

Synopsis

This paper provides a good starting point for the basic valuation strategies. The strategies covered include book-to-market, earnings-to-price and a naive measure of cash-flow-to-price. Stocks with high fundamental-to-price ratios ('value stocks') are shown to outperform stocks with low fundamental-to-price ratios ('glamour stocks') for up to five years in the future. Annual hedge portfolio returns average about 10%. The paper also tries to show that the success of these strategies results from investors' naive extrapolation of past growth rather than risk. But inspection of their results suggests that naive extrapolation of past growth explains only part of the story.