Value Investing Through the Lens of Campbell-Shiller

Value investors and finance academics have different methods for forecasting returns. Value investing focuses on purchasing assets that are undervalued relative to their intrinsic values, as determined through a framework designed to quantify the potential worth of underlying cash flows or liquidated assets. The CampbellShiller identity is a celebrated academic formula that connects current dividend yield to future returns, dividend growth, and dividend yield. The authors expand and apply the CampbellShiller relationship to earnings yield and earnings growth, and demonstrate that traditional value investing and the CampbellShiller identity provide the same investment advice illustrate their similarities in an example with two specific securities. Using sellside projections, the authors show that the CampbellShiller formula is an effective screening tool that can be used in tandem with traditional value analysis.