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No. of Recommendations: 10
The recent discussion of Dimensional (DFA) funds has finally yielded some interesting fruit, thanks to DrTarr's persistence. When JBKing first referred to "French research," I thought it was something that had taken place in France, and no, I am not kidding. One has to remember, when posting here, that not everybody is starting from the same base of experience!

A bit of Googling leads one to Kenneth R. French's own website at Dartmouth (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/). I did not peruse the whole thing, but I am posting it for anybody who wants to. By the way, the Google results reveal that the guy is indeed quite well known, outside of my brain at least. <g>

Meanwhile I wanted to see what the Fund company says about itself, and how it reflects Ken French, as DrTarr said. At the main website for Dimensional Funds there is a section about its "philosophy" ("http://www.dfaus.com/philosophy/markets/) that says, among other things:

Dimensional's core belief is that markets are "efficient." Dimensional distinguishes itself by applying this philosophy to its entire range of investments... markets assemble and evaluate information so effectively that the price of a stock is usually our best estimate of its intrinsic value.

I'm not sure why they posit the Efficient Market Hypothesis as their core belief, when in fact the rest of their stated philosophy is that it is quite possible to purchase, and profit from, stocks that are underpriced -- i.e., "value" stocks.

It so happened that my "French" Google search also turned up a very interesting section on the Investor Home website: "Historical Stock Market Anomalies" is at http://www.investorhome.com/anomaly.htm It begins thusly:

Despite strong evidence that the stock market is highly efficient, there have been scores of studies that have documented long-term historical anomalies in the stock market that seem to contradict the efficient market hypothesis. While the existence of these anomalies is well accepted, the question of whether investors can exploit them to earn superior returns in the future is subject to debate.

I had to laugh when I saw that last part. Yep, you can find a LOT of those debates on this board, and other places on the Fool! <g>

Going further into the site, one comes to "Fundamental Anomalies" (http://www.investorhome.com/anomfun.htm) which discusses the question of "Value" stocks, and refers readers to many other sources. Among other things, it says:

Value investing is probably the most publicized anomaly and is frequently touted as the best strategy for investing. There is a large body of evidence documenting the fact that historically, investors mistakenly overestimate the prospects of growth companies and underestimate value companies. Professors Josef Lakonishok, Robert W. Vishny, and Andrei Shleifer concluded that "value strategies yield higher returns because these strategies exploit the mistakes of the typical investor and not because these strategies are fundamentally riskier."

A discussion follows about the various ways that people identify value stocks, including "Low Price to Book" ratio, an area in which Ken French's work is cited. Other characteristics often used include Low Price to Sales, Low Price to Earnings (PE ratio), and High Dividend Yield. There is also a paragraph about "Neglected Stocks" that essentially describes a simple Contrarian strategy.

There's a lot more to read there, but I'll end simply with this cute quotation:

"Value criteria act like a chaperon at a party, making sure you don't fall for some sexy stock with a great story."

--James O'Shaughnessy, in What Works on Wall Street
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