Josef Lakonishok doesn’t really attract the same attention as many superstar investors but his successful transition from academic researcher to billion dollar fund manager is nonetheless legendary. Having spent 30 years studying investor behaviour and market anomalies, Lakonishok used his findings to devise a methodical way of finding attractively valued shares just at the point when the market is beginning to recognise them. Not only has the strategy been a strong performer in 2013, but the list of shares currently meeting Lakonishok’s rules in the UK and Europe offers a particularly wide range of options for investors. 

Lakonishok has been a major contributor to research into behavioural finance and the ways in which markets and investors can sometimes act erratically. Influenced by Benjamin Graham’s value investing principles of buying unloved stocks at attractive prices, his work led him to conclude that investors are often too reliant on the past when predicting the future. He believes they frequently pay too much for good companies by ignoring fundamentals and becoming emotionally attached to them. 

In response, he developed a strategy that blends two complementary investing approaches – value and momentum. He looks for shares that are cheap on any one of four common measures (price-to-book, price-to-earnings, price-to-cashflow or price-to-sales) but to avoid a so-called value trap, they also have to be rising in price. To find them, Lakonishok looks to see which of his cheap stocks have begun to see price strength over the previous six months – and whether this strength has sustained or even improved in the most recent three months. He also regards positive earnings surprises or upgraded recommendations by brokers as tell-tale signals that the share price could be on the move. 

From theory to fortune 

In 1994, Lakonishok and his academic partners started LSV Asset Management to put their finance theory into practice and its various funds now manage $69.7 billion of investor cash. In 2012, LSV’s Value Equity Fund produced a return of 20.3%. Its performance was dented by market conditions during 2007 and 2008 but the 10 year return remains a reasonable 7.7%. At Stockopedia we track a screen that uses all of these criteria and over the past 12 months it has returned an impressive 39%, beating the FTSE 100 by 22.3%. Over the past three months alone, the…

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