Strategies · Library · Stocks
§3.3Factor
Value
Rank stocks by book value relative to price. Buy the cheapest decile and short the most expensive decile, on the idea that cheap companies are mispriced and drift back toward fair value over months.
- Asset class
- Stocks
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Book value per share divided by price.
- Entry and exit
- Rank at each rebalance; hold one to six months, then re-rank.
- Sizing
- Equal weights within each side, long and short balanced.
How it fails
- Cheap stocks can stay cheap (value traps)
- Long stretches of underperformance
- Book value is stale and accounting-dependent
- Shorting needed
Data it needs
- book value per share
- daily prices
Prices are available but book values are not.
How ARCANE uses it
A Call that a cheap group outperforms would need a valuation input ARCANE lacks; a price-only proxy such as distance from a long-run high is only a weak stand-in.
Needs book value data and a short leg; no price-only version keeps the idea.
Filed under the factor card
Own companies that are small, cheap, profitable and invest conservatively, against their opposites, and rebalance once a year.
A paper plan from this card holds 63 to 365 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.3, p. 43 of the SSRN version. Described in our words. Factor is ARCANE’s filing, not the book’s.