What Is Value?

Abstract

The work of Jules Regnault, Francis Galton, John Rae and Vilfredo Pareto covered Duration, Behavior, and Value. Regnault talked about stock market science, statistical nature of Value, duration importance and price behavior. Galton laid the foundation for the robust behavior of Reversion in natural phenomenon. Rae introduced the idea of intertemporal choices which showcased time inconsistency in human behavior and Pareto talked about another robust behavior now known to be ubiquitous in natural systems as a power law. Duration, Behavior, and Value are inseparable. Statistical behavior of natural systems (e.g. stock markets) expresses themselves durationally. And because stock market systems exhibit uncertainty and order, this creates inconsistencies (anomalies). Instead of acknowledging the statistical behavior of stock market systems, a few generations of researchers have focused on explaining these inconsistencies through behavioral biases, leading to a polarized debate around efficiency and inefficiency of markets. This debate has many casualties, one of the key being the global investor and how he(she) understands Value. If stock market systems function statistically, value creation and its transformation into growth are statistical phenomena rather than driven by fundamental, psychological or economic factors. Value is misunderstood by the global investor. Despite the fact that Value stocks move from an inexpensive state to expensive state while Growth under performs and drags in performance over the longer durations moving from an expensive state to a less expensive state, Value and Growth are interpreted as disconnected ideas which are assumed to be only defined fundamentally. This narrow definition of Value has added to the academic confusion around inconsistencies and created an investing style bias. Investing styles are at the heart of the investment business, which brings along with it new factors like ‘Size’. These various factors overlap with each other. On occasions, it has been even seen that the factors are a proxy for each other. This raises the question regarding the theoretical foundation driving the respective factors. If Value can be explained statistically, it will also explain factors like Growth, Size, Momentum and other factors and hence bring in a needed clarity of how markets function and whether there is a universal factor that drives stock market systems.