High price and reputation means better value? Really?

Share On Facebook
share on Linkedin

It turns out that if you tell people that one painkiller costs 10p and the other £2 in tests they will, on average, say that the more expensive one is much better at getting rid of their pain. This is the case even if the compounds are identical (this has even been tested using sugar pills demonstrating a variation on the placebo effect). Similarly, if you ask people to taste-test bottles of wine after telling them the prices they will, on average, say that the £6 one is much worse than the £60 one. This is true even if the wine is identical.


While the high price = quality heuristic works well in many situations, it frequently lets us down.

That brings us to expensive shares: could it be that our in-built psychological bias against cheapness leads us away from value shares, causing a failure to benefit from the extra return value shares offer? Do people have a dislike for things that are on sale?

We can test this by examining two groups of shares, (1) the most “admired” shares because these companies have performed well on business fundamentals and shares have risen a lot on the stock market, and (2) the “despised” group, with poor past performance both in fundamentals and their shares are lying lowly priced.

For the two groups we can judge whether the admired shares get bid up too far and the despised pushed too low by imagining that we buy a bunch of each and then track performance over the next few years.

Statman, Fisher and Anginer published such a study called “Affect in a behavioural asset pricing model” in 2008. They took those companies admired by respondents to the Fortune surveys and followed their subsequent returns.

Each year Fortune asked more than 10,000 senior executives, directors and security analysts who responded to the survey to rate the ten largest companies in their industries on eight attributes of reputation, using a scale of zero (poor) to ten (excellent).

The Admired portfolio contains the stocks of the one-half of companies with the highest scores and the Despised portfolio contains the 50% stocks with the lowest scores over the period 1982 to 2005.

You can see from the table that the admired companies had “glamour” share characteristics whereas the despised tended to have value characteristics. The admired companies are indeed better companies. But if the share prices are bid up too much they might become poor investments compared with the despised companies.

Characteristics of stocks admired and despised portfolios, mean values 1982-2005

Admired shares Despised shares
Returns in previous year 22% 11%
Returns previous 3 years 81% 38%
Returns previous 5 years 169% 80%
MCap ($m) 19 6
Earnings-to-price ratio 0.066 0.079
Book-to-market ratio 0.49 0.75
Cash-flow-to-sales ratio 0.103 0.136
Sales growth (log change 2 years) 0.101 0.035
Earnings growth (log change 2 years) 0.127 0.052
Return on assets 0.158 0.125

Results over the following two yea…………..To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

CLICK HERE TO REGISTER FOR FREE ON ADVFN, the world's leading stocks and shares information website, provides the private investor with all the latest high-tech trading tools and includes live price data streaming, stock quotes and the option to access 'Level 2' data on all of the world's key exchanges (LSE, NYSE, NASDAQ, Euronext etc).

This area of the ADVFN.com site is for independent financial commentary. These blogs are provided by independent authors via a common carrier platform and do not represent the opinions of ADVFN Plc. ADVFN Plc does not monitor, approve, endorse or exert editorial control over these articles and does not therefore accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at ADVFN.com is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by ADVFN.COM and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Authors may or may not have positions in stocks that they are discussing but it should be considered very likely that their opinions are aligned with their trading and that they hold positions in companies, forex, commodities and other instruments they discuss.

Leave A Reply

Do you want to write for our Newspaper? Get in touch: newspaper@advfn.com

By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions

P: V: D:20220816 00:54:03