Value investing and

accrual investing
By

KOLAGANI HARICHANDANA
VALUE TRADING:
• It is an investment strategy that involves picking stocks that appear to be trading for less than their
intrinsic or book value
• Value investors actively search out stocks they think the stock market is underestimating
• They believe the market overreacts to good and bad news, resulting in stock price movements that do
not correspond to a company's long-term fundamentals

BOOK VALUE:
• It is sum of all the profits a company has accumulated in the past and the initial investment that was
put into the company

MARKET VALUE:
• Market value is the price an asset would fetch in the marketplace

BOOK TO MARKET RATIO:

• It is ratio of book value to market value
• High book to market ratio is considered better as it means the company is undervalued and its market
value will increase in future
• As investors aim is to “buy low, sell high”, value investors believe in long run, companies with high
market to book ratio outperform the ones with low book to market ratio
EARNINGS TO PRICE RATIO:
• Latest earnings are an indicator of how a company is performing recently
• Stocks with high E/P ratio are undervalued as compared to low E/P ratio stocks as they indicate high
earnings per rupee of investment
• We should take long positions on companies with high E/P ratio

INVESTMENT STRATEGY:
• Ideally we should go long on companies whose both E/P and B/M ratios are high
• We should go short on companies whose both E/P and B/M ratios are low
• When one is low and one is high, for industries going through growth phase, E/M ratio is considered
and for industries in mature phase, B/M ratio is considered
 Lab Experiment 7

• In this I grouped available stocks using

horizontal slider with value of 4
• I tried to go long on stocks with high B/M
ratio
• I observed that stocks with high B/M ratio
out perform stocks with low B/M ratio
• I achieved a cumulative return of 75.58
against benchmark return of 28.56
• I got alpha of -0.12 and beta of 2.52 and
sharpe ratio of 0.38
• My alpha and sharpie ratios are low cause
excessive and irrational risk
 Lab experiment 8

• In this I grouped available stocks using

vertical slider with value of 4
• I tried to go long on stocks with high E/P
ratio
• I observed that stocks with high E/P ratio
out perform stocks with low E/P ratio
• I achieved a cumulative return of 32.25%
against benchmark return of 13.32%
• I got alpha of .14% and beta of 2.04and
sharpe ratio of 0.28
• My alpha and sharpie ratios are saw
betterment as I tired to lower risk I tried
to choose stocks with high return and high
E/P ratio
 Lab Experiment 9(a)

• In this I grouped available stocks using

vertical slider with value of 2 and
horizontal slider value 4
• I observed that stocks with high E/P and
B/M ratio out perform stocks with low
E/P and B/M ratio
• I achieved a cumulative return of 20.26%
against benchmark return of 22.27%
• I got alpha of .03% and beta of .89 and
sharpe ratio of 0.36
• My alpha and sharpie ratios are low
causing higher risk investments
 Lab Experiment 9(b)

• In this I grouped available stocks using

vertical slider with value of 2 and
horizontal slider value 4
• I invested on stocks with high E/P and
B/M ratio
• I achieved a cumulative return of 54.15%
against benchmark return of 22.27%
• I got alpha of -.032% and beta of 2.7 and
sharpe ratio of 0.29
• My alpha and sharpie ratios are low cause
of higher risk investments
ACCRUAL STRATEGY:
• Accruals are adjustments made for revenue earned but not received by the company i.e they are
unrealized earnings
• There is risk that they are not going to get paid
• So, the earnings will be reduced at a later date
• When picking stocks, we need to pick companies with low accrual numbers
• Accruals can be both negative and positive
• We need to adjust this number for large and small companies

ACCRUAL TO TOTAL ASSETS RATIO:

• This ratio allow us differentiate between small and large companies
• The lower the value the better it is

INVESTMENT STRATEGY:
• We try to pic companies with low accrual to asset ratio, high B/M ratio and high E/M ratio
 Lab Experiment 10

• In this I grouped available stocks using

vertical slider with value of 2 and
horizontal slider value 4
• I invested on stocks with high E/P and
low A/T ratio
• I achieved a cumulative return of 118.2%
against benchmark return of 25.08%
• I got alpha of .15% and beta of 3.6and
sharpe ratio of .41
• My alpha and sharpie ratios are low cause
of higher risk investments