The introduction of the paper states:
As devoted “Value Investors”, it was our intention to back-test existing screening models for Eurozone stocks, as well as models that we had developed.
Being located in Europe ourselves, we were interested in finding out how European stocks react- what would the outcome be- of applying different Value-screening methods to stocks and especially to a portfolio of stocks.
For this project we studied different value-investment strategies that we could implement in our application.
We were especially attracted to existing methods, The Magic Formula by Joel Greenblatt, Joseph Piotroski’s nine point scoring mechanism, Benjamin Graham’s Net Current Asset Value and using our own ERP5.
For this paper we went back 10 years in time and used fundamental constituents familiar to value investors such as Price to Book, Return on Investments, Direction of Earnings, Earnings Yield etc.
We were also curious to learn whether markets were, indeed, as efficient as the theory indicates they are in the modern finance.
“And contradictory in a big way. It’s now very clear that the market makes BIG mistakes in pricing stocks. It doesn’t see through reported accounting numbers. It’s typically overly optimistic about to-be-reported earnings.
It projects that successful firms will continue their success for far too long into the future”
(Haugen; The inefficient Stock Market).
As we proceeded, we also asked ourselves questions such as;
-Should we invest in an index fund rather than in individual stocks?
-Where and how can we find undervalued stocks ?
-What happens to performance if we add more stocks to a “Value” portfolio?
-What happens to performance if we join two “Value” screeners together?