Behavior Finance
Value vs. Growth Strategy
Professor: Dr. M. Kamstra
Class: FINE 6500 A
Due: November 23, 2014
Students: Harivan Jaffer 213882279
Jeremy Foster 207012370
Zefu Chen 213160999
In the traditional finance theories, investors are thought to act rationally so as to maximize their return and that emotions and behavior have no real affect on the trading of equities and other investments. However, there are ways and strategies that take advantage and prevent some of these cognitive shortcomings.
One such investing strategy is based on investing in value stocks for a extended period of time rather then the sheen of glamour, high growth stocks that do well in the short run, but not in the long term. Value stocks are that equities that have low book to market (B/M), low price to earnings (P/E), which have stable revenue sources and incomes and whose stock prices do not have great volatility. Value stocks perform better in the long run then glamour stocks, equities that have high B/M and P/E ratios. These glamour stocks usually have a lot of momentum going for them, but in the long run they inevitably revert to the mean, thus there high shares prices come back down while value stocks tend to go back up. It is very difficult to get past the psychological barrier of missing out on highflying stocks, however automating ones portfolio to limit risk and bank on solid fundamentals such long term growth will ultimately leave ones portfolio and wealth better off.
A simple investment strategy would be to pick a classic blue chip stock, one with solid revenues, huge cash flows and preferably a nice yield (dividend). One such stock would be Verizon Communications. When looked at on a 10-year basis its revenues have grown by 5.93% on average, more then doubling in the past 10 years, operating income has grown by 15.6%, net income by 14% and earning per share by 13.6% on average for the past ten years.i In addition to the growth, it yields 4.3% for just holding
Professor: Dr. M. Kamstra
Class: FINE 6500 A
Due: November 23, 2014
Students: Harivan Jaffer 213882279
Jeremy Foster 207012370
Zefu Chen 213160999
In the traditional finance theories, investors are thought to act rationally so as to maximize their return and that emotions and behavior have no real affect on the trading of equities and other investments. However, there are ways and strategies that take advantage and prevent some of these cognitive shortcomings.
One such investing strategy is based on investing in value stocks for a extended period of time rather then the sheen of glamour, high growth stocks that do well in the short run, but not in the long term. Value stocks are that equities that have low book to market (B/M), low price to earnings (P/E), which have stable revenue sources and incomes and whose stock prices do not have great volatility. Value stocks perform better in the long run then glamour stocks, equities that have high B/M and P/E ratios. These glamour stocks usually have a lot of momentum going for them, but in the long run they inevitably revert to the mean, thus there high shares prices come back down while value stocks tend to go back up. It is very difficult to get past the psychological barrier of missing out on highflying stocks, however automating ones portfolio to limit risk and bank on solid fundamentals such long term growth will ultimately leave ones portfolio and wealth better off.
A simple investment strategy would be to pick a classic blue chip stock, one with solid revenues, huge cash flows and preferably a nice yield (dividend). One such stock would be Verizon Communications. When looked at on a 10-year basis its revenues have grown by 5.93% on average, more then doubling in the past 10 years, operating income has grown by 15.6%, net income by 14% and earning per share by 13.6% on average for the past ten years.i In addition to the growth, it yields 4.3% for just holding