Cliff Asness: The Confusion Around Value Investing

In this interview on The Bogleheads Podcast, Cliff Asness discussed his time with Gene Fama, and the confusion around value investing. Here’s an excerpt from the interview:

Rick Ferri: Well let me ask just a couple of questions on what you just said. Did Fama ever call what he did value investing?

Cliff Asness: You know, it’s funny you ask that because I keep meaning to go back and check the original papers. I don’t believe so. It’s certainly possible when the world started calling it that that they eventually referred to it that way. I don’t even know that, but I don’t remember them calling it a value factor or whatnot. I think that it was index providers and maybe other papers that did it. I think they were just looking at multiples and whatnot to sort stocks. I could be dead wrong about this but from memory I don’t remember being in Chicago and talking about value investing.

But certainly that label caught on and I actually don’t even think it’s the best label. It creates tremendous confusion because your kind of Graham-and-Dodd old-fashioned concentrated portfolio active management — value managers, people call themselves value managers get mad because they look at the quantitative factor and they say that’s not value. Value is the price against fundamentals in consideration of things like which are better companies, safer companies, faster growing companies, more profitable companies.

The answer is quants don’t think price divided by anything — book, sales, cash flow, earnings — is the only thing you should judge on. We agree with those managers and we just call them different factors, things like the profitability factor, earnings momentum, low risk investing. Those are all in the direction of the things the Graham and Dodd people want us to consider.

But they just put the whole thing together and call it a cheap company, one that’s cheap considering these other factors. We break it up and call them other factors, and you know a thousand fights have been called caused by that when they’re really through very different methods, concentration versus diversification, judgment versus systematic, but through very different methods, I think they’re often looking for the same kind of things in the stocks.

You can listen to the entire interview here: