Mgt 4067 Final Paper
Ryan Yan
Final Project Status Report
2/28/2013
Executive Summary
While there are many different types of investment strategies, each one of them aims to score the highest returns. One investing strategy, however, has always withstood the test of time. In 1934, Benjamin Graham and David Dodd published Security Analysis, which uses fundamental analysis and laid the intellectual foundation of value investing. Perhaps the most prolific businessman, Warren Buffet, has also used this strategy of value investing to make billions. This paper outlines the philosophies used in value investing and provides a portfolio that attempts to reflect these principles. The composition as well as the performance of the portfolio will be discussed in later sections of the paper. Keep in mind, however, that it is extremely difficult to test the validity of the value investing strategy over such a short time horizon. In fact, one should feel very comfortable holding “value stocks” in his or her portfolio across multiple business cycles.
Investment Philosophy
Firstly, it is important to distinguish investment philosophy and investment strategy. The underlying rationale behind picking stocks in this portfolio will be based on the value investing philosophy. Value investing almost completely discounts market fluctuations and focuses much more on finding stocks of substantial value – companies that are on the market for cheap. In principle, with time, the market will correct itself and the stocks that have been picked when they are low will return or even supersede what they are deemed to be worth today in the market. Now, in terms of strategy, one can choose stocks that are not considered traditional “value stocks,” such as stocks with higher P/Es ratios (beyond 10), and still derive plenty of value from the respective company depending on the timeframe of investment. This, however, truly depends on the industry in which the respective company lies. Using the value investing
Final Project Status Report
2/28/2013
Executive Summary
While there are many different types of investment strategies, each one of them aims to score the highest returns. One investing strategy, however, has always withstood the test of time. In 1934, Benjamin Graham and David Dodd published Security Analysis, which uses fundamental analysis and laid the intellectual foundation of value investing. Perhaps the most prolific businessman, Warren Buffet, has also used this strategy of value investing to make billions. This paper outlines the philosophies used in value investing and provides a portfolio that attempts to reflect these principles. The composition as well as the performance of the portfolio will be discussed in later sections of the paper. Keep in mind, however, that it is extremely difficult to test the validity of the value investing strategy over such a short time horizon. In fact, one should feel very comfortable holding “value stocks” in his or her portfolio across multiple business cycles.
Investment Philosophy
Firstly, it is important to distinguish investment philosophy and investment strategy. The underlying rationale behind picking stocks in this portfolio will be based on the value investing philosophy. Value investing almost completely discounts market fluctuations and focuses much more on finding stocks of substantial value – companies that are on the market for cheap. In principle, with time, the market will correct itself and the stocks that have been picked when they are low will return or even supersede what they are deemed to be worth today in the market. Now, in terms of strategy, one can choose stocks that are not considered traditional “value stocks,” such as stocks with higher P/Es ratios (beyond 10), and still derive plenty of value from the respective company depending on the timeframe of investment. This, however, truly depends on the industry in which the respective company lies. Using the value investing