An online monthly research publication by the Ivey Business School 

Volume 14, Number 7
July 2008

“Big numbers”

The research of George Athanassakos shows how value investors get better returns

On January 9, 2008, George Athanassakos, Ivey’s Ben Graham Chair in Value Investing, wrote an article for the Globe and Mail. At the time the financial world was holding its breath, waiting to see if the U.S. economy would slip into a recession. Athanassakos, recently named by the Globe and Mail as one of Canada’s leading financial scholars, entitled the article: “Bad news – the recession is already here.” Most economists would now agree that Athanassakos was right.

Athanassakos based his opinion on his research into “market anomalies” – inefficiencies in the financial markets that provide opportunities for investors. A significant market anomaly is found in the stock market adage: “Sell in May and go away.”

This expression stands for the idea that markets do better from November to April than the rest of the year. When Athanassakos put it to the test, he found it was true. Between the beginning of November and end of April from 1957 to 2003, stocks enjoyed a positive return in 38 of the years, with negative returns in only nine. In seven of those nine years, the economy was undergoing a recession. This, said Athanassakos in his article, explained the current bear market.

Between May and October, on the other hand, stocks on average experience no growth. This gives rise to an interesting scenario, says Athanassakos. “Over the last 50 years, my numbers show that if you had invested in stocks, particularly smaller ones, from November to April, and then in T-bills or government bonds between May and October, you would have made an annual average return of 24 percent.”

He explains these anomalies by linking them to the behaviour of professional portfolio managers. Their goal, he says, is to maximize their Christmas bonuses, which are based on performance benchmarks. In January, with time on their side, they tend to take more risks, bidding stocks up in the process. As the year moves along, they become more cautious, often selling riskier stocks to lock in their profits. “Individuals working for institutions have their own agendas that often conflict with their organizations’ agendas,” he says.

In other research, Athanassakos compares the performance of value stocks with growth stocks. Value investors look for stocks that are potentially undervalued, and therefore prefer those with low price-earnings ratios. In one study he found that between 1985 and 2006, Canadian stocks with low PE ratio stocks outperformed high PE stocks by 12 percent. In the United States low PE ratio stocks outperformed by 9 percent, and in Australia by 6 percent.

As a value investor, Athanassakos prefers small cap stocks that are followed by few analysts. “Value investors tend to stay away from glamorous stocks that are in the public eye,” he says. “If you buy a small stock with potential, eventually it will become larger and more visible. Then institutions will want to buy it.”

His research finds that small-cap stocks with low PE ratios outperformed large-cap stocks with high PE ratios by an average of 19 percent. He also found that small-cap stocks with low analyst following outperformed large-cap stocks with high analyst following by 17 percent. “Those are big numbers,” he says.

In another stream of research, Athanassakos looked at Canadian stocks that are interlisted in the United States. Canadian companies interlist in U.S. markets for reasons of visibility, liquidity, and ability to raise money. Athanassakos wanted to examine why some traded more briskly than others. He found that interlisted stocks that trade a lot in the U.S. are those that American investors think will help them become more diversified. This has important implications for corporate managers who are thinking of interlisting, says Athanassakos. “Managers should ask whether the stock will give American investors the opportunity to diversify without having to go outside U.S. markets. If the answer is yes, they will likely have more trading volume.”

Warren Buffett, who learned the art of value investing as a student of Ben Graham, recently invited Athanassakos and 115 Ivey students to spend the day with him at his company headquarters in Omaha, Nebraska. They talked about different investment ideas and strategies, and Buffett affirmed that value investors needed discipline and patience to be successful. “Buffett is a wise man, not just in investing but in all aspects of life,” says Athanassakos. “Spending a day with him was a once-in-a-lifetime opportunity.”

Professor Athanassakos holds the Ben Graham Chair in Value Investing.
 

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