“The LWM strategy is a very intuitively intelligent approach to stock market investing. I particularly like the emphasis on buying undervalued, tangible assets and the strength of the analysis that underpins the investment process.”
Case Study 2: Enhancing the Value Premium
The outperformance of value investment over other strategies has come to be known as the "value premium”.
A study published in the UK in 2005 which focused on British stocks from 1975 to 2003, examined the scale of the value premium. The study sought to identify whether investing in relatively small portfolios of stocks that offered ‘extreme value’ would dramatically increase the value premium.
The study showed that focused portfolios of extreme value stocks produced returns of 40%+ over the 28-year period.
This contrasted with growth stock portfolios that typically returned less than the risk-free rate (the investment return that could have been achieved by investing in government bonds).
Source: Keith Anderson, Chris Brooks, “Extreme returns from extreme value stocks: Enhancing the value premium” (2005)
We deliberately restrict the number of stocks in our portfolio, typically holding only 25 – 35 companies. Experience has shown that this allows us to enhance the value premium, whilst at the same time enabling us to dramatically reduce risk by diversifying our portfolio across different industries, different countries and different currencies.