Disproving the Efficient Market Theory: The Value Line Method
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Authors
Silverman, Alexander
Issue Date
1993
Type
Thesis
Language
en_US
Keywords
Alternative Title
Abstract
As a new employee of the Value Line Investment Survey, I
have come to realize that our subscribers pay our significant
annual fee not only for the basic financial data, but for a
"Timeliness Ranking" with which I have very little say in
administering. This rating uses backward-looking information in
order to predict an issue's potential, relying little on the
analyst's ''view of the future ." It therefore became of interest,
when I was proudly informed that I worked for a firm that has
beaten the market consistently for the past 25 years, using this
"Timeliness Ranking."
As a student of economics for four years, I have read and
been taught that it was next to impossible to find a consistently
inefficient market with which to invest. As an employee of a
firm that has beaten the market, and has the printed proof, I was
fascinated to learn the secret of its success.
Efficient market theorists claim that if an active market is
truly efficient, then investors should not be able to
systematically outperform the indexes. The reason being that,
since a stock's price incorporates all of the company's
information already, competition among well informed investors
prevent the price from straying too far away from its intrinsic
value. Therefore, the price of the issue is the true worth of
' the stock and, logically, no one is going to pay more for
something than it is worth.
Luckily, Value Line developed a ranking system, whereby they
rate the 1700 companies they cover into five categories,
according to how they are expected to perform, with respect to
each other, over the next 12 months. The system uses five
elements in order to derive each stock's rating, including
historical earnings and price growth in relation to previous
years, price-earnings ratio (P/E), price momentum, and an
earnings surprise factor. Each of these have been proven to
stand on its own, to a varying degree, and as a unit have beaten
the market consistently since 1965.
What I have found is that even the most die-hard efficient
market followers are willing to concede to Value Line's
performance. Therefore, the question is not whether or not the
ranking has beaten the indexes, and, in effect, the efficient
market hypothesis, but how it accomplishes this feat.
Description
45 p.
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License
U.S. copyright laws protect this material. Commercial use or distribution of this material is not permitted without prior written permission of the copyright holder.