Book Review: Quantitative Value

Book Review: Quantitative Value

A couple months ago I finally had a chance to read Wes Gray and Tobias Carlisle’s book Quantitative Value.  While this book certainly is not for everyone, the opportunity to take a deep dive into a talented money manager’s investment strategy is rare.

Quantitative Value is a comprehensive look into the origination and implementation of Gray and Carlisle’s value investing philosophy.  It is well written and the authors’ willingness to provide total transparency and openness in discussing the philosophy is admirable.  As an investment advisor, I am always looking for ways to expand my knowledge and gain a more sophisticated understanding of the products and strategies available today.  Quantitative Value describes in detail a novel investment philosophy that any value advocate will learn from and appreciate.

I’ve been a big fan of the work Dr. Gray and his team at Alpha Architect have been putting out for the past couple of years.  In my opinion, their research on quantitatively driven behavioral investment strategies is second to none and it has been highly influential to my own thinking.


The book can be separated into three major parts.  First, Gray and Carlisle lay a foundation for their work by discussing the allure and history of traditional value investing, its strengths and its weaknesses.  The middle of the book dissects and evaluates countless financial ratios, metrics and case studies as it details the thorough research that went into developing the strategy.  Finally Gray and Carlisle pull everything together into a actual quantitative value model and stake it against other successful value strategies.

Gray and Carlisle begin by describing the differences between famous value investor Warren Buffet and perhaps the most famous market quant Ed Thorp.  They state that while at first glance, the ideas Buffet and Thorp had about investing may have seemed diametrically opposed, both investors agreed on one important thing; if you have an edge, the market is beatable.  The authors believe that while a value strategy may provide that edge, some other element is required to fully exploit it.  Buffet believed the edge was temperament.

From Buffet’s thoughts on temperament, Gray and Carlisle segue into a discussion about behavioral finance.  They describe how temperament and emotions cause behavioral errors that often create investment opportunities.  Cognitive biases, inherent to us all, cause investors to overreact to bad news and oversell stocks to the point they are undervalued. This is known as the value anomaly and is precisely the phenomenon value investors look to exploit.

“the very consistency of the strategy is an important reason for its success.”

Gray and Carlisle recognize that having a system in place to eliminate errors caused by our natural biases is critical for success.  They saw a path to achieving this goal and a way to improve consistency by marrying Buffet’s value style with Ed Thorp’s quantitative approach to investing.   The authors readily admit they are not blazing trails by quantitative value investing, but are focused on refining and improving upon the ideas and theories of those that came before them.

The middle (and majority) of the book describes the nuts and bolts of the strategy.  Gray and Carlisle use a checklist as the backbone of their stock selection methodology.  The benefits of this structure were famously identified by surgeon Atul Gawande in a 2007 New Yorker article.  The authors believe the checklist aids consistency in a complex process and helps eliminate “preventable mistakes”.

“The power of the quantitative approach is both in the protection it affords us against our own gambling instinct and in its relentless exploitation of the small edges provided by others’ errors.”

The Quantitative Value stock selection philosophy is broken into four major pillars.  In each of these categories, Gray and Carlisle review many different metrics and identify those that have consistently delivered the best signals.

  • Avoiding Permanent Loss of Capital – A means of eliminating those companies likely engaged in financial statement manipulation, fraud or that are in financial distress.
  • High Quality – Identify companies that have franchise power and financial strength.
  • Deeply Undervalued – Use of price ratios to find companies the market has most undervalued.
  • Other Participant Price Signals – Interpret the impact that participant price signals such as short selling, buybacks and insider purchases may have on future prices.

After outlining their comprehensive research, Gray and Carlisle conclude the book by utilizing their advanced screening process to build out the Quantitative Value strategy.  They thoroughly test the process for robustness and answer the important question of “does it make economic sense”.  Although the financial analysis behind their screening is somewhat complex, their implementation is simple and elegant.  They provide, in detail, comprehensive backtesting results and even offer “a look inside the black box” by listing each position the model would have held over the past 35+ years.

Victor Frankenstein would be proud of the way Gray and Carlisle have melded the best ideas from the Father of Value (Graham), The Father of Quantitative Investing (Thorp) and the Father of Behavioral Finance (Kahneman).  In my opinion, the Quantitative Value strategy, has met and exceeded the authors’ stated goal of bringing quantitative value strategies to their logical conclusion.  While they might not yet be household names to most value investors, I have little doubt that the research and philosophies preached by Carlisle, Dr. Gray and his team at Alpha Architect will be highly influential in the investing community for years to come.

Tim Brennan

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