Value investing: Bridging theory and practice

Value investing refers to the buying or selling of stocks on the basis of a perceived gap between their current market price and their fundamental value.  One of the most remarkable regularities in the asset pricing literature is the fact that value investing has consistently generated positive abnormal returns. In this study I revisit the theoretical underpinnings of the value approach and summarize what is now an extensive body of evidence in support of its existence. In an accounting-based valuation framework, I show that what we have learned about value investing from recent academic studies in fact dovetails nicely with the strategies being used by such legendary investors as Ben Graham, Warren Buffett, and Joel Greenblatt.