Bauman Conover Miller Study

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INTRODUCTION INTRODUCTION Bauman, Conover, Miller Bauman, Conover, Miller study was conducted to find study was conducted to find which investment strategy which investment strategy was better in terms of was better in terms of returns in long run -Value returns in long run -Value Investment or Growth Investment or Growth investment. investment.

Transcript of Bauman Conover Miller Study

Page 1: Bauman Conover Miller Study

INTRODUCTIONINTRODUCTION

Bauman, Conover, Miller study was Bauman, Conover, Miller study was conducted to find which investment conducted to find which investment

strategy was better in terms of strategy was better in terms of returns in long run -Value returns in long run -Value

Investment or Growth investment.Investment or Growth investment.

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VALUE INVESTINGVALUE INVESTING

The strategy of selecting stocks that The strategy of selecting stocks that trade for less than their intrinsic value.trade for less than their intrinsic value.

In value investment investors select In value investment investors select stocks with lower than average price to stocks with lower than average price to book or price to earnings ratio and/or book or price to earnings ratio and/or high dividend yields.high dividend yields.

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GROWTH INVESTMENT GROWTH INVESTMENT

An investment strategy were investment An investment strategy were investment is made in those stocks that trades at a is made in those stocks that trades at a relatively higher price in relation to some relatively higher price in relation to some fundamental factors, as well as high past fundamental factors, as well as high past rates of growth in EPS.rates of growth in EPS.

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METHODOLOGYMETHODOLOGY

Given below are the details relating Given below are the details relating to the types of companies included in to the types of companies included in the studies, how they were grouped, the studies, how they were grouped, the frequency of rebalancing and the the frequency of rebalancing and the variables tested. variables tested. 

  

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Stocks in the selected universe for the Stocks in the selected universe for the studies were ranked on the basis of the studies were ranked on the basis of the independentindependent variables variables to be to be tested.  Portfolios were then formed by tested.  Portfolios were then formed by grouping stocks on the basis of the grouping stocks on the basis of the rankings. After a certain period of time, rankings. After a certain period of time, stocks were then ranked again and the stocks were then ranked again and the portfolios were rebalanced portfolios were rebalanced accordingly. The returns on the various accordingly. The returns on the various portfolios were then compared.portfolios were then compared.

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Type of Companies selected:Type of Companies selected:21 Countries and approx. 2800 stocks21 Countries and approx. 2800 stocks

Grouped by: QuartilesGrouped by: Quartiles

Variables Tested:Variables Tested:Price/Earnings,Price/CashFlows, Price/Earnings,Price/CashFlows, Price/Book ValuesPrice/Book Values

Frequency of Rebalancing: AnnualFrequency of Rebalancing: Annual

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RESULTSRESULTS

In the Bauman Conover Miller Study it was In the Bauman Conover Miller Study it was found that Price/book value was a better found that Price/book value was a better indicator ofindicator of value than value than price/earnings,price/cashflow,or dividend price/earnings,price/cashflow,or dividend yield.   yield.   

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CONCLUSIONCONCLUSION Value investing strategies outperformed growth strategies. Value investing strategies outperformed growth strategies.

This held true regardless of which variable was used to This held true regardless of which variable was used to identify value stocks. Variables that were used to identify identify value stocks. Variables that were used to identify value stocks included price/earnings, price/book value, value stocks included price/earnings, price/book value, price/cash flow, price/free cash flow, and dividend yield. price/cash flow, price/free cash flow, and dividend yield. None of the studies found evidence to support the view None of the studies found evidence to support the view that value strategies involve more risk. that value strategies involve more risk.

Although growth stocks initially experience higher growth Although growth stocks initially experience higher growth rates than value stocks, the growth rates of both quickly rates than value stocks, the growth rates of both quickly revert toward the mean. When investing in stocks, revert toward the mean. When investing in stocks, investors demonstrate over-optimism for growth stocks investors demonstrate over-optimism for growth stocks and over-pessimism for value stocks. Several researchers and over-pessimism for value stocks. Several researchers expect the value investing advantage to continue, based expect the value investing advantage to continue, based upon the persistent nature of human behavior. upon the persistent nature of human behavior.

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OUR METHODOLOGY

Given below are the details relating to the types of companies included in our studies, how they were grouped, the variables tested

Top 1250 companies (in order of Market Capitalisation) are studied.

Variables tested: P/E, P/BV, P/E*P/BV

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Step-I: Select Companies whose P/E less than 10

Step-II: Out of the above companies select companies whose earnings growth rate of the latest Quarter is greater than 40%.

Step-III: Find P/E*P/BV of chosen companies.

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COMPANYCOMPANY NP NP VAR VAR %(12 %(12 Mths Mths ending ending MAR,2MAR,2010)010)

P/E P/E RATIO(12 RATIO(12 Mths ending Mths ending MAR,2010)MAR,2010)

P/BV12 P/BV12 (Mths (Mths ending ending MAR,2010)MAR,2010)

P/E*P/BVP/E*P/BV NP(MAR NP(MAR 2010,QTR)2010,QTR)

NP%(MAR NP%(MAR 2010,QTR)2010,QTR)

ABC Bearings 145 7 1.32 9.24 6.55 644

Birla Corpn. 84 5 1.55 7.75 137.5 52

CCL Products 35 8.5 1.14 9.69 3.52 209

Central Bank 85 5.6 1.35 7.56 171.06 174

Diamond Power 17 8 1.81 14.48 22.34 88

Eveready Inds. 217 6.4 0.64 4.096 12.51 124

S B T 13 4.5 1.06 4.77 217.22 13

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UCO Bank 82 3.9 1.1 4.29 379.8 270

FINOLEX Cables 174 6.8 1.14 7.752 11.6 334

Oriental Bank 27 7.5 1.13 8.475 317.04 75

Hyd.Industries 100 5.5 1.93 10.615 26.38 190

L G Balakrishnan 86 7 1.09 7.63 6.36 771

JB Chem & Pharm 28 6.6 1.1 7.26 26.98 118

Vardhman Textile 138 7.4 1 7.4 61.07 926

COMPANYCOMPANY NP VAR NP VAR %(12 %(12 Mths Mths ending ending MAR,201MAR,2010)0)

P/E P/E RATIO(1RATIO(12 Mths 2 Mths ending ending MAR,201MAR,2010)0)

P/BV12 P/BV12 (Mths (Mths ending ending MAR,201MAR,2010)0)

P/E*P/BVP/E*P/BV NP(MAR NP(MAR 2010,QTR2010,QTR))

NP%(MAR NP%(MAR 2010,QTR)2010,QTR)

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Jay Bharat Mar. 103 7.1 1.62 11.502 7.85 157

Jindal Saw 71 9 1.67 15.03 180.27 84

JSW Steel 111 9.7 2.11 20.467 716.95 999

Lanco Inds. 218 4 1.3 5.2 12.39 141

Mold-Tek Pack. 103 4.4 1.18 5.192 2.07 159

Sasken Comm.Tec. 121 6.6 1.04 6.864 23.84 999

Swiss Glascoat 30 8 1.37 10.96 0.99 83

COMPANYCOMPANY NP VAR NP VAR %(12 %(12 Mths Mths ending ending MAR,2010MAR,2010))

RP/E RP/E ATIO(12 ATIO(12 Mths Mths ending ending MAR,2010)MAR,2010)

P/BV12 P/BV12 (Mths (Mths ending ending MAR,2010)MAR,2010)

P/E*P/BVP/E*P/BV NP(MAR NP(MAR 2010,QTR2010,QTR))

N2010,QTN2010,QTRP%RP%(MAR)(MAR)

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Kale Consultants 90 8.7 1.47 12.789 6.65 56

SRF 28 4.8 1.1 5.28 103.02 268

Nitta Gelatin 70 5.7 1.32 7.524 4.67 88

Simm. Marshall 176 5.9 1.69 9.971 1.54 999

Shivam Autotech 20 9 1.21 10.89 4.88 187

Peninsula Land 106 5.6 1.39 7.784 106.09 168

Kale Consultants 90 8.7 1.47 12.789 6.65 56

SRF 28 4.8 1.1 5.28 103.02 268

COMPANYCOMPANY NP VAR NP VAR %(12 %(12 Mths Mths ending ending MAR,20MAR,2010)10)

P/E P/E RATIO(12 RATIO(12 Mths Mths ending ending MAR,2010)MAR,2010)

P/BV12 P/BV12 (Mths (Mths ending ending MAR,2010)MAR,2010)

P/E*P/BVP/E*P/BV NP(MARNP(MAR 2010,QTR2010,QTR))

NP%(MAR NP%(MAR 2010,QTR2010,QTR))