Contrarian Investment, Extrapolation, and Risk
NBER Working Paper No. 4360
For many years, stock market analysts have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This paper provides evidence that value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier.
Published: Journal of Finance, December 1994, Vol. XLIX, No. 5, pp. 1541-1578.