A Short History of Value Investing and its Implications

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I would like to thank Andrew Cornell, Shaun Cornell, Aswath Damodaran, Richard Gerger, and Ivo Welch for helpful comments on earlier drafts of this paper.


This paper argues that what came to be called value investing was an historical accident. It arose in large part because the influential work of Graham and Dodd preceded the development of electronic spreadsheets leading them to propose short-cut estimates of value based on accounting ratios. The demise of the value premium in the last 12 years has led to doubts regarding the efficacy of this approach to value investing and efforts to adjust the accounting ratios to make them more robust. The argument here is that these efforts are misguided. Instead, it must be recognized that value investing amounts to comparing estimates of fundamental value with price and that accounting ratios, however tweaked, are not a reasonable way to estimate value – it requires a full blown DCF analysis. The paper then goes on to address some of the implications of that assertion.


It is the spring of 1978 and Harvard Business School student Dan Bricklin has a problem. He is sitting through yet another case discussion that requires him to produce a detailed financial forecast in the form a large matrix of rows and columns. The problem is that each time he changes one of the entries, it ripples through the entire matrix which he must recalculate with his handheld calculator. The work is incredibly tedious and time consuming. Bricklin thinks to himself, wouldn’t it be wonderful if the spreadsheet were electronic? Each cell could be a number, a label, or a formula relating cells to each other. As soon as any cell is changed the entire matrix would be recalculated instantly.

Following up on his idea, Bricklin joined with Bob Frankston to found Visicorp. The company’s first product, Visicalc, was the world’s first electronic spreadsheet which ran on the newly introduced Apple II computer. The product was an immense success. It was the first blockbuster software sensation of the personal computer revolution and was a big reason for the booming sales of the Apple II.