Examining the Skewness and Kurtosis of Value vs. Glamour Portfolios

We analyze the relationships between higher moments (i.e., skewness and kurtosis) of common stock portfolio returns in the context of how they reflect the behavioral traits or investment style of market participants. Normally, any participant in the stock market is classified as an investor. However, Benjamin Graham, the acknowledged father of value investing, defines investment as an operation that upon thorough analysis promises safety of principal and satisfactory returns. Anything other than that is speculative. We classify investors, or more specifically value investors, as those who make their investment decisions in a manner consistent with Benjamin Graham's definition. In contrast to Benjamin Graham's definition, traditional finance theory labels as “investor” anyone who is making choices among financial assets. In this paper, we make a distinction between those who are behaving as investors as defined by Benjamin Graham and those who are making common stock investment decisions that are more representative of gambling behavior. We hypothesize that the common stock portfolio returns of value investors will be more negatively skewed, or at least lower than that of gamblers. Similarly, we hypothesize that the kurtosis of portfolio returns of value investors will be greater than that of gamblers. Using stock returns data from NYSE from 1999 to 2013, we created two portfolios based on price-to-book ratio: one we call quasi value (lowest price-to-book) and the other glamour portfolios (highest price-to-book). We then compared the higher moments of both sets of portfolios. The results show that contrary to what we hypothesized, the returns of glamour portfolios had lower skewness than the quasi value portfolios. However, as hypothesized, the kurtosis of the quasi value portfolios were higher than those of the glamour portfolios. We interpret that to mean that without a full value investing analysis, the extent of diversification of a portfolio is the primary determinant of its skewness