How Long Does it take for Value to Reflect?

$100 𝐁𝐢𝐥𝐥

An old joke has two finance professors walking along the sidewalk; when one spots a $100 bill and bends over to pick it up, the other grabs his arm and says, "Don't bother. If it were really a $100 bill, someone would have taken it already’’.

Efficient Market Hypothesis

The efficient market hypothesis is an academic theory claiming that the price of each stock incorporates all publicly available information about the company. With millions of investors scouring the market every day, it is unlikely that severe mispricings can persist for long.

While the market is not perfectly efficient, it is pretty close most of the time so, if an investor comes across such ‘mispricings’ it should be taken with a pinch of salt followed by - thorough research, proper risk management and patience.

How long does it take for 'Value' to reflect?

Let's look at an example;

Thesis - We created an equally weighted portfolio of the Top 10 value stocks.

The Value factor was calculated using a weighted combination of 5 customised ratios using the following parameters - PE Ratio, Book Value, Market Cap to Sales, Enterprise Value and Earnings

3 different portfolios were created using the same logic - 3 years ago, 6 years ago and 10 years ago and the returns to date were calculated.

This gives us an understanding of how much time it truly takes for ‘Value Unlocking’

3-Year Data Chart

6-Year Data Chart

10-Year Data Chart

As you can see from the attached charts, a 10-year horizon or more is needed to beat the benchmark. The hardest part is holding the portfolio during market downturns or not selling when the wider market is doing better than your portfolio.

About the Author

Rohan Borawake is a SEBI Registered Investment Advisor and Finance Writer dedicated to providing valuable insights through his blogs and articles, catering to both everyday individuals and investors. For more of his content, follow him on LinkedIn by clicking the link - Rohan Borawake.

To gain a more profound understanding of quantitative analysis or witness its application in action, consider following Sabir Jana, the Head of Quantitative Research at Finsharpe, on LinkedIn. Click the provided link to connect with him on the platform- Sabir Jana.

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