Author name: Gor Boyajyan, page [1]

Title: A Comparative Analysis of Three Different

Investing Strategies
Research Question: Which one of the following types of stocks will have
the best investment performance in the long-run; undervalued stocks,
overvalued stocks or Warren Buffetts Investment Portfolio stocks?

Author: Gor Boyajyan

Research Study in Finance and Investment Management
Financial Markets
Table of Contents
Background of the Research Study2
The aim of the research study....2
Methodology..3
Calculations determining undervalued and overvalued stocks..4
Changes made to the accounts over the period of the research
study.......................................................................................................4
Evaluations based on the existing reports..5
Predictions based on the evaluation of the existing reports...6
Bibliography...7
Appendices.8

Author name: Gor Boyajyan, page [2]

Background of the Research Study

The three major stock exchanges in United States (NYSE, Amex, and NASDAQ) have more
than 5,500 public companies listed in them. Shares of these companies are traded on daily bases,
resulting in millions of transactions a day. An average investor could easily earn an adequate
return from investing in major stock indexes which have low investment risk, which is one of the
two most common investing strategies. However, for greater returns, intelligent investors who
would challenge themselves to outperform the market, they would need to separate different
types of stocks and do extensive research studies to know which investing strategies provide
higher annual returns than the safer stock indices, such as the S&P500. The authors research and
analysis has led to an assumption that all the publicly traded stocks can be generalized into two
categories: overvalued stocks and undervalued stocks.
Additionally, taking into account the recent trend of following the big players, entire investing
communities had been formed around the practices of buying the same stocks as the legendary
investor Warren Buffett, for instance. This constitutes the second very common investing
strategy. Warren Buffett uses a unique investing strategy where he buys companies stocks that
sell less than their intrinsic value. Nevertheless, there is a difference between undervalued stocks
and the securities that Warren Buffett buys. This difference is that Warren Buffett invests in
businesses that he understands, and acquires an incomparably larger number of shares than the
average investor, leading to very different risks and opportunities.
Hence, as the author believes that there is a more profitable way of investing than the two
common practices outlined above, the following independent research paper is going to analyze
and compare three investing practices.

The Aim of the Research Study

The aim of the research study is to compare three investing techniques and to come up with a
comparative analysis of them, deriving the most profitable one within the boundaries of a
simulation game. The first technique used is going to purchase overvalued stocks, while the
second technique is going to be based on Warren Buffetts current stock investing choices, while
the third one, proposed by the author, is going to be based on purchasing undervalued stocks.

Author name: Gor Boyajyan, page [3]

Methodology
The platform used for the simulation game is going to be the Investopedia Stock Simulator. The
simulator uses real time index data and replicated it, creating a genuine investing experience,
where only the money is not real. Three accounts are going to be created, with 10,000 USD of
virtual money as investing funds. The first account will hold 10 representative undervalued
stocks. The second account will hold 10 overvalued stocks. The third account will hold 10 stocks
that Warren Buffett owns in his investment portfolio.
As the author believes that only long-term investing will reveal the true returns of the investing
strategies, the research study will encompass investing simulations over a timespan of two years,
starting from February 5, 2016 and ending in February 5, 2018. After the results of each account
are available, the author will analyze, compare and contrast the investment performances of
overvalued, undervalued and Warren Buffetts stocks. After the evaluation and synthesis, the
research paper will conclude which strategy will yield highest returns, deeming itself to be the
most beneficial for investors.
The investment simulation shall start in February 2016 and end in February 2018, together with
the research study itself (Appendix 1). Information about the performance of each account will
be extracted from the Investopedia in a report format. First report will be presented 1 month after
the start of the simulation. The following reports will be written every 4 months. The final report
will be the last month of the research study.
The stocks that will be bought are randomly chosen from the companies trading in the New York
Stock Exchange. The choice to invest in a fixed number of 10 different stocks for each investing
account is derived from the goal of ensuring that the stocks bought are representative of their
groups. Additionally, the stocks that are initially bought will not be sold unless the stock
becomes overvalued in the undervalued stocks account or the stock becomes undervalued in the
overvalued stocks account. The reason is that if the stocks are traded during the two-year
timespan, profit shall be generated. Taking the profit out of the game will create a handicap for
the given account, while reinvesting it will jeopardize the equality of the amount of capital
invested for each account, i.e. 10,000 USD. The list of stocks purchased is represented in
Appendix 2.
Regarding the Warren Buffetts investment portfolio stocks account, if Warren Buffett sells his
stake in any of the companies bought in the Investopedia account, then the author will not
hesitate to sell that stock from the account and buy another one that Warren Buffett owns. All of
this is done to ensure that each stock in each account will continue being representative of their
group throughout the whole period of the research study. As each account will initially have
$10,000, it will use $1,000 to invest in each stock, with no exceptions to the rule.

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Calculations, Determining Undervalued and Overvalued Stocks

The calculation used for determining if a stock is undervalued or overvalued is one of the
techniques that Warren Buffett and his teacher at Columbia University, Benjamin Graham, came
up with. The two investing ratios that they used in calculating the intrinsic value of stocks
compared to the stock price are the P/E ratio and P/BV ratio.
The Price-Earnings Ratio (P/E) is the ratio for valuing a company that measures its current share
price relative to its per-share earnings (Investopedia, 2016). The two investing strategists
believed that the P/E ratio should be less than or equal to 15.
The Price-To-Book Ratio (P/BV) is a ratio used to compare a stock's market value to its book
value. It is calculated by dividing the current closing price of the stock by the latest quarter's
book value per share (Investopedia, 2016). According to these strategists, this ratio should be
less than or equal to 1.5.
Using these two ratios, they came up with a special number 22.5, through multiplying the P/E
ratio by the P/BV ratio. According to the father of value investing, Benjamin Graham, the 22.5
number could always be used to estimate if a stock is undervalued or overvalued. If we multiply
the P/E ratio with P/BV ratio of any given stock, and get a number less than or equal to 22.5,
then the stock is undervalued and meets the two legendary investors criteria. However, if the
multiplication is more than 22.5, then we could be fairly certain that the stock is overvalued. The
author of this research paper used this method to determine which stocks should be bought in the
undervalued stock account and in the overvalued stock account.

Changes made to the accounts over the period of the Research Study
(Updated with every new report)

There have been some changes in the stocks held by the three accounts that hindered the
objective representation of their stock type. For this reason, the following readjustments have
been made to compensate for these risks.
Here are the changes made:
1. Undervalued stocks account-MDLZ, ACCO, CAJ, ALG, AHT stocks were initially
undervalued. However, they became overvalued so the author sold all of them and
replaced them with AL, AYR, EHIC, CALL, XL which are undervalued stocks.
2. Overvalued stocks account-MSI overvalued stock started to have negative earnings so the
author sold them and bought FB stock (negative EPS is also a sign of becoming
undervalued).
3. Warren Buffetts investment portfolio stocks account: Warren Buffett sold his stake in
Wall-Mart and ConocoPhillips, so the author sold it as well and invested in CHTR and
PSX which are companies that Warren Buffett has a stake in.

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Evaluation based on the existing Reports

At the time of the latest update of the report, being November 2016, there are three reports for
each Investing account (Appendix 3a, 3b, 3c). The reports presented allow for the author to
conduct analysis based on the ranking, account value and projected annual returns of the stocks.
These three evaluation techniques were used, as they are the components that express the
investment performance of the accounts in the long run.
Ranking
In Investopedia Simulator, there are approximately 156,000 amateur investors who have
investment accounts. Within this multitude of users, based on the projected annual return
percentage, the three simulation accounts ranked as follows (Appendix 4):
Overvalued stocks:
3,141 (Mar 16), 9,810 (Jul 16), 138,579 (Nov 16)
Warren Buffets stocks: 119,537 (Mar 16), 142,171 (Jul 16), 133,776 (Nov 16)
Undervalued stocks:
4,158 (Mar 16), 1,919 (Jul 16), 2,366 (Nov 16)
If the slope of a graph is positive, then the ranking worsened while if the slope is negative, then
the ranking improved. While the only account which improved its ranking consecutively is the
undervalued stocks account, the ranking of the overvalued and Warren Buffetts accounts
worsened consecutively. The undervalued stocks account improved its ranking by roughly 43.1%
from March till July, and an additional staggering 18.8% from July till November. This suggests
that buying undervalued stocks is a competitive strategy that can yield high returns and beat
many other investing techniques that other Investopedia users have. Thus, undervalued stocks
account comes as a winner. If we compare and contrast the overvalued stocks account with
Warren Buffetts stocks account, overvalued stocks account worsened cumulatively by 4311%
while Warren Buffetts stocks account worsened by 18.9% from March till November. However,
in conclusion, overvalued stocks account did better than Warren Buffetts stocks account
because it ended with 138,579/156,000 while Warren Buffetts stocks account ended with
142,171/156,000 in the third report.
Account Value
The Account Value is defined as the portfolios current value and is calculated as
Account Value = cash + market value of stocks + market value of options market value of
shorted stocks (Please, find the account values in Appendix 5)
In this case, if the graph has a positive slope then the account value improved while if the slope
is negative then the account value figure worsened. Based on this fact, we can state that the
account values of undervalued stocks and Warren Buffett stocks improved. However, as the
account value of undervalued stocks increased by 15.11% from March till November and ended
with $12,464.35, while Warren Buffetts stocks account value ended with $9,121.60 in the third
report, we can definitely conclude that the undervalued stock account ends up as the winner.
Additionally, although overvalued stock account worsened, it still ended with a better account
value than Warren Buffetts stock account value.
Annual Returns
The annual return of an investment portfolio is the most important figure that all investors take
into account. Also, the overall investment performance of an account might solely be based on

Author name: Gor Boyajyan, page [6]

the annual returns of the portfolio. The annual return is defined as the amount of returns
generated if your current rate of returns were extrapolated for an entire year. Please, find the
projected annual returns of the three accounts in Appendix 6.
From the diagram, we can see that undervalued stocks would always provide adequate returns if
they were sold on the same days the reports were extracted. However, we can see a trend that as
the holding period extends the annual return of undervalued stocks decreases over time. The
same goes with overvalued stocks as they start strong but finish with negative annual return. If
we compare those two accounts, we can deduce that if we were to liquidate both of the accounts
after one month of holding period, from February till March, then the undervalued stocks
account would provide 140.96/12 = 11.74% return while the overvalued stocks account would
provide 219.88/12 = 18.3%. However, if we were to sell the stocks on the day of extracting the
third report, the undervalued stocks account would provide positive return while the overvalued
stocks account would provide negative return. Regarding the annual return of Warren Buffetts
stock account, we can infer that as holding period lengthens, the annual return improves although
it would still be negative even after 9 months of investment from February till November.

Predictions Based on the Evaluation of the existing reports

Appendix 7 illustrates the investment performance of the three accounts based on three factors
which are ranking, account value and annual returns. The diagram illustrates that undervalued
stocks were leading in all of the three categories: ranking, account value and annual returns.
Thus, we can definitely predict that buying undervalued stocks is one of the lucrative investing
strategies that an investor can use. However, it is important not to draw any conclusion yet as the
evaluation was based on only three reports. Regarding the other two accounts, we can predict
that overvalued stocks will do better than Warren Buffetts stocks. However, this is ironic as
from the analysis one may assert that buying the same stocks that Warren Buffett buys will most
likely not be profitable. This begs the question of how the worlds third wealthiest person can be
using a disadvantageous strategy.
After analyzing certain factors, there is an answer to why an average investor will not make the
same amount of money that Warren Buffett does, by following his choices. The answer is that
the average investor uses small sums of investing capital while Warren Buffett invests billions of
dollars in companies of his choice. Thus, as Warren Buffett buys more shares than an average
investor, he earns high dividend returns that cover any losses made from price fluctuation. Thus,
there is a strong possibility that the reason why Warren Buffetts stocks account will
underperform the other two accounts is because only $10,000 is invested in the companies. Many
investors need to understand that what is important is not the strategy that Warren Buffett uses
now, but what strategy he used when he started as an average investor. The story tells that he
used net-net investing strategy which is about buying certain types of undervalued stocks. Thus,
this also answers why the undervalued stocks account will most likely outperform the other two
accounts. And if the Warren Buffetts stocks account underperforms, this will justify that the
only way an investor can have lucrative returns by using Warren Buffetts strategy is to invest
only large sums of money in the companies that Warren Buffett buys.
The research shall await further reports in order to draw a conclusion based on long term results.

Author name: Gor Boyajyan, page [7]

Bibliography
David, (2008) Stock Exchanges of the World and the Number of Listed Companies, [Online],
Available: http://topforeignstocks.com/2008/12/26/stock-exchanges-of-the-world-and-the-number-oflisted-companies/ [13 Dec 2016].
Investopedia, (2016) Price-Earnings Ratio - P/E Ratio, [Online], Available:
http://www.investopedia.com/terms/p/price-earningsratio.asp [10 Oct 2016].
Investopedia, (2016) Price-Earnings Ratio - P/E Ratio, [Online], Available:
http://www.investopedia.com/terms/p/price-to-bookratio.asp [10 Oct 2016].

Author name: Gor Boyajyan, page [8]

Appendices:
Appendix 1: Timeline of Reports of the Research Study
Starting Date of the Research Study: February 5, 2016
Estimated Finish Date of the Research Study: February 5, 2018
1. First report: March 5, 2016
2. Second report: July 5, 2016
3. Third report: November 5, 2016
4. Fourth report: March 5, 2017
5. Fifth report: July 5, 2017
6. Sixth report: November 5, 2017
7. Seventh report: February 5, 2018

Appendix 2: The list of stocks in each account

The List of Undervalued Stocks Purchased:
1. TRV-TRAVELERS COMPANIES,
INC.
2. F-FORD MOTOR COMPANY
3. C-CITIGROUP INC.
4. JPM-JPMORGAN CHASE&CO.
5. AAN-AARONS, INC
6. ACCO-ACCO BRANDS
CORPORATION
7. CAJ-CANON INC
8. MDLZ-MONDELEZ
INTERNATIONAL, INC
9. ALG-ALAMO GROUP INC
10. AHT-ASHFORD HOSPITALITY
TRUST, INC

The List of Overvalued Stocks Purchased:

1. AAPL-APPLE INC
2. WFM-WHOLE FOODS MARKET,
INC
3. MSFT-MICROSOFT CORPORATION
4. UA-UNDER ARMOUR, INC
5. CPB-CAMPBELL SOUP COMPANY
6. DO-DIAMOND OFFSHORE
DRILLING, INC
7. CELG-CELGENE CORPORATION
8. TSS-TOTAL SYSTEM SERVICES,
INC
9. ORLY-OREILLY AUTOMOTIVE,
INC
10. MSI-MOTOROLA SOLUTIONS, INC

The list of Stocks from Warren Buffetts Investment Portfolio account:

1. BAC-BANK OF AMERICA CORPORATION
2. GM-GENERAL MOTORS COMPANY
3. WMT-WAL-MART STORES, INC
4. COP-CONOCOPHILLIPS
5. JNJ-JOHNSON&JOHNSON
6. PG-PROCTER&GAMBLE COMPANY
7. IBM-INTERNATIONAL BUSINESS MACHINES CORPORATION
8. AXP-AMERICAN EXPRESS COMPANY
9. KO-COCA-COLA COMPANY
10. WFC-WELLS FARGO&COMPANY

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Appendix 3: Investment Portfolio Reports:

Appendix 3a: Warren Buffetts Investment Account

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Appendix 3b: Overvalued Stock Investment Account

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Appendix 3c: Undervalued Stock Investment Account

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Appendix 4: Investment Portfolio Rankings on Investopedia Ranking System

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Appendix 5: Investment Portfolio Account Values

Appendix 6: Annual Returns of the Investment Accounts

Appendix 7: Comparative Total Evaluation of the Accounts