As I’m now entering the fourth module of my 1st year in business school, I’m starting to get into some of my elective classes for investment management.

So far, it has been a lot of academic-focused lessons on efficient markets, betas, CAPM, and factor models…not exactly topics that mesh with trying to outperform the markets by picking undervalued stocks!

Even so, it has been helpful to understand the viewpoint of academic finance. Even if I do disagree with most of it, I can appreciate the process behind many of the studies.

In fact, the best part so far has been having access to massive amounts of quality financial data and academic research.

I thought I would include a few of the more interesting charts and graphs from the year so far.

Returns on Small vs. Big

Academic Research - Returns by Market Capitalization Deciles

Source: Professor Ken French’s Data, 1926-2008

Confirmation that small stocks outperform larger ones (and validation for the small-cap focused nature of this blog).

Returns on Value vs. Growth

 Academic Research - Returns by Book-to-Market Deciles

Source: Professor Ken French’s Data, 1926-2008

And that value stocks outperform growth (high market-to-book = low P/B stocks):

Returns by Liquidity

Academic Research - Illiquidity Premiums

Source: J. Liew and M. Vassalou, “Can Book-to-Market, Size and Momentum Be Risk Factors That Predict Economic Growth?”

Illiquidity can also be a factor in producing above-average returns. This chart shows the alpha generated by stocks across the liquidity range, above and beyond what is predicted by CAPM and the Fama-French 3-factor model.

Whether or not CAPM or the FF-model does a good job of predicting returns is another debate (they really don’t).

However, if an investor is patient, a willingness to tie up capital for an extended period (hopefully in an undervalued security) could yield above-average results.

Risk Premiums 

Academic Research - Forecasted Equity Risk Premiums

Source: John R. Graham & Campbell R. Harvey, “The Equity Risk Premium in 2010”

This chart is pulled from a forecast of CFOs on the equity risk premium used in cost of capital calculations.

An initial look at the graph shows that premiums are extremely volatile, which further weakens the validity of a CAPM model.

Interestingly, the reported risk premium hit a low in 2006/2007, just before the bubble popped (and when most stocks were overpriced).

On the other hand, CFOs demanded a much higher premium (and therefore thought future projects were riskier) in the early part of 2009, right when investors should have been buying.

Could a low risk premium be an indicator for poor stock market performance?

Earnings Surprises

Academic Research - Earnings Surprises

Source: R.J. Rendleman Jr., C. P. Jones, and H. A. Latane, “Empirical Anomalies Based on Unexpected Earnings and the Importance of Risk Adjustments”

Many short-term focused hedge funds play an earnings game, and it turns out that there is some interesting effects, especially after large earnings surprises.

Efficient market proponents would argue that the market immediately adjusts to reflect the new earnings picture after an unexpected quarter, but studies have shown that earnings continue to drift for several months.

A possible takeaway: If a stock reports a surprisingly bad quarter which changes the fundamental thesis about the company, it’s better to sell right away vs. trying to time a better exit point in the future.


Academic Research - Activist Success Rates

Despite some very high-profile activist campaigns, only 29% actually succeed. It’s no surprise that lowering compensation and removing a management team have a below-average success rate.

As a microcap investor, going private transactions have been a key source of unlocking value, and the success rate probably reflects the fact that management is often on board in these transactions.

Asset Class Returns

Academic Research - Asset Class Cumulative Monthly Returns

Access to high quality financial data allows a study of asset class returns over long time periods.

In this chart, the dip in 2008/2009 is clearly shown across almost every single asset class.

In fact, correlations between asset classes tend to increase significantly during high volatility periods, just at the time when diversification is supposed to provide the greatest benefits.

1982 – 2011

Academic Research - Asset Class Returns Past 20 Years

Look at the risk-reward of midcaps over the past 20 years…a possible underinvested asset class?

2002 – 2011

Academic Research - Asset Class Returns Past 10 Years

Over the past 10 years, stocks have performed poorly, as bonds returned nearly the same amount with much lower risk.

Final Thoughts

This post was a bit outside of my normal zone, so please let me know if you found this post interesting and/or worthwhile, and I’ll plan on collecting similar information going forward.

I’m also the getting involved in Kenan-Flagler’s student-run investment fund, which provides the opportunity to manage roughly $2m across a wide range of asset classes.

As the new Equities Manager, I’m responsible for the stock investments, so I’m looking forward to getting some practical experience over the next year – more stock pitches to follow!


As a student in UNC’s full-time MBA program, I was recently selected to participate in the Cornell MBA Stock Pitch Competition, one of the premier business school investment management events.

I’m happy to announce that our team was voted as a finalist in the competition (a great showing for UNC!), although we ended up losing out to NYU and Wharton in the finals. Some background on the event:

Cornell MBA Stock Pitch Competition

Teams from each school are provided a list of stocks at 11am on Thursday, and 3 powerpoint stock pitches are due by midnight – trust me when I say that it’s a wild 12 hours.

The pitches are then presented on Friday morning in front of portfolio managers at buy-side institutions like Fidelity (the lead sponsor), American Century, and Putnam Investments.

Each pitch is 10 minutes long, with a 5 min Q/A afterwards, and teams can recommend a long, short, or hold on each individual stock.

Our choices:

Every team was required to pitch the same stock in the first round, and then could pick one stock out of the lists for each of the two subsequent rounds.

Round 1: Required – GMCR

Round 2: Advertising – LAMR, CCO, IPG

Round 3: Asset Managers – FII, TROW, LM, WDR

Can anyone guess the stock I ended up pitching?

Although my investment philosophy has been refined over time, my process has always centered on finding businesses that are mispriced in some capacity.

I’ve had the most success among the deep value stocks found in the microcap realm, but I can also appreciate buying great businesses at fair prices – even if those businesses are outside of the normal ‘value investing’ metrics.

Even with this open mindset, I find that some businesses are trading at such high prices that I couldn’t even imagine the possibility of investing there…

Enter Green Mountain Coffee Roasters (GMCR)

GMCR is probably the ultimate anti-value investing stock – the company is selling at a P/E of 70x, has negative free cash flow, heavy insider selling – the list goes on.

At the same time, it is expected to grow 100% in the next year and has been one of the fastest growing companies over the past five. Due to these and many other factors, it is probably one of the most controversial stocks anywhere (outside of maybe NFLX).

To make it even harder, David Einhorn of Greenlight Capital fame just unveiled a scathing 110-page powerpoint presentation on the stock at the recent Value Investing Congress, causing a 40% sell-off in the last month or so.

As a team we decided that we wouldn’t be able to add anything unique or original to Einhorn’s presentation in such a short period of time, and therefore decided to go long GMCR  (I know, I know).

We ended up splitting up the responsibilities so each team member worked on an individual stock, and the GMCR assignment fell to me – which is ironic since the stock is pretty much on the complete opposite end of my normal investment universe.

Anyways, here is what I was able to put together in 12 hours:

Lessons Learned

Although it was very difficult to put myself in the mindset of someone who could be long GMCR, I think it was a great exercise that will improve my overall investing approach. A few lessons from the experience:

  • Buying behavior – how does it apply to a company’s products?
  • Growth dynamics – what combination of factors leads to such explosive growth?
  • Acquisition strategy – can buying up competitors ever be strategic enough to ignore fundamentals?
  • Identifying the opposing rationale – are all alternative viewpoints explained by the investment thesis?
  • Valuation – how to value high-growth companies with little or no cash flow?
  • Investment Thesis – how to synthesize vast amounts of information into the key points within a tight time window?

The greatest investors not only have the fortitude to follow a strategy during difficult times, but the ability to incorporate divergent viewpoints. I want to make sure that I stay open to other investing styles as I develop in my investing career.

Analyzing a stock – especially an extreme case like GMCR – from such an uncomfortable viewpoint provided a great deal of perspective. I hope to carry these lessons into future investment decisions.

Even so, I won’t be buying GMCR anytime soon. :)


No positions.

This week marks the one year anniversary of!

Since launching back in May 2010, the blog has been visited over 50,000 times and now boasts 750+ RSS subscribers.

Even better than the anonymous statistics, I’ve also heard from a large number of readers via email, and these discussion with other value investors has been absolutely invaluable.

Looking back on some of my old posts,  I think my analysis has certainly evolved and hopefully improved, but I remain committed to many of the same core beliefs as to when I started – a focus on obscure, undervalued, micro-cap stocks and special situations.

Favorite Posts

Here are just a few of my favorite posts:

A Journey Through the Pink Sheets – 3,698 Stocks Later

Probably my most ambitious investing project to date, I went through every pink sheet stock one-by-one to narrow it down to a watch list of several hundred securities.

The post generated more emails and comments than any other, and I now have a great list of stocks to keep an eye on – stay tuned as I will probably be writing about many of them over the coming months.

Evolution of My Value Investment Philosophy – Part I

Evolution of My Value Investment Philosophy – Part 2

A two part series, this describes the evolution of my value investing philosophy, from dividends to FCF to CROIC to special situations and beyond. I’ve come a long way from 2007 – when I first started investing – I still cringe at some of the mistakes I made during that initial half year.

But after switching over to Zecco in early 2008, and really taking investing seriously, my investing strategy has evolved and the results along with it. There is always room to improve, but I am happy with the progress I’ve made since I started writing down my ideas last year.

Newly Expanded Value Investing Resources

One of the most popular pages on Value Uncovered, my resources page goes through the tools and resources I use to find many of the investing ideas posted on this site.

Hopefully the number of page views is proof that readers are getting significant value from the links provided – I have an update planned soon, so keep an eye on the resources page for new additions.

Thank You

Most of all, I want to thank all of my readers, commentors, and other value investors who have helped promote Value Uncovered. The support is great, and I would encourage others to join in on the conversation, whether by commenting on, sending in guest write-ups, or dropping me a line via email.

Hearing from other value investors and discussing ideas is one of my favorite parts of running the blog.

After 120+ posts, it’s still going strong.

Happy investing!