1. What It Means to Be a Value Investor
International Investment German Forum
19 September 2007
Nicholas Davidson
Senior Portfolio Manager
Bernstein Value Equities

2. Agenda What is Value investing? Why does Value investing work?
Is now the time to buy Value?

3. Some Insights From Ben Graham: What is Value Investing?
Markets are inefficient
Intrinsic value and market price are not the same
A strategy of buying stocks well below intrinsic value will produce superior returns in the long run

4. Alternative Approaches to Value Investing
Classic
Quasi-Control
Modern Portfolio
Research
Cursory
Intensive
Extensive
Value Metrics
Tangible Assets
Franchise Value
Normalised Earnings Replacement Value Private Market Value Relative Value
Portfolio
Diversified
Concentrated
Time Horizon
Medium
Very long
Any
Examples
Graham
Buffett
Gabelli, Neff

5. Academic Research Suggests Value Investing Works
Year of Discovery
Research Period
Monthly Premium %
Subsequent Monthly Premium %
Australia
1998
1975 to 1995
0.2
0.7
Belgium
0.5
Canada
1995
1986 to 1993
0.1
France
1993
1981 to 1992
0.4
Germany
(0.1)
Hong Kong
(0.3)
Italy
(0.2)
Japan
1991
1972 to 1988
Netherlands
1.4
Singapore
0.3
1.2
Sweden
Switzerland UK US
1985
1973 to 1984
*Maturity premium from year of discovery through end of 2003
Source: Low-Cap and Low-Rated Companies, Dimson, Marsh and Staunton, The Journal of Portfolio Management European 2004

6. Value Outperforms, but…
Since Inception relative performance of MSCI Value Index versus Broad Market Index
Market
Alpha
Beta
Value Volatility
Market Volatility
Japan*
3.1
0.9
22.1
22.6
Pac Basin ex Japan*
1.4
1.0
23.1
22.4
UK*
1.2
22.7
Emerging Markets**
25.3
25.2
Europe ex UK*
1.1
17.3
17.1
USA*
14.6
15.2
*Inception Date: 31 December 1974
**Inception Date: 31 December 1998
MSCI Value Index vs. MSCI Core Index
As of July 31, 2007
Source: MSCI and AllianceBernstein

7. …is it Compensation for Higher Risk?
Not if defined in the usual way
Market
Alpha
Beta
Value Volatility
Market Volatility
Japan*
3.1
0.9
21.5
22.0
Pac Basin ex Japan*
1.4
1.0
22.4
21.7
UK*
1.2
22.3
Emerging Markets**
20.6
20.8
Europe ex UK*
1.1
16.9
16.7
USA*
14.2
14.7
*Inception Date: 31 December 1974
**Inception Date: 31 December 1998
MSCI Value Index vs. MSCI Core Index
As of July 31, 2007
Source: MSCI and AllianceBernstein

8. Agenda What is Value investing? Why does Value investing work?
Is now the time to buy Value?

9. Why does Value investing work?
Emotional biases lead investors astray
Loss Aversion
Anchoring
Competitive markets ensure reversion to the mean

10. Behavioural Explanations: Loss Aversion
Which Would You Prefer?
Choice A
Choice B
Amount
Probability
Amount
Probability
$4, % $3, %
Expected Value $3,200 $3,000
Popularity 20% %

11. Pleasure Loss Gain Pain
Loss Aversion
Pleasure
Small Pleasure
Loss
Gain
Big Pain
Pain

12. Value Investing Paradigm
Long-Term Earnings Power
Investment
Controversy
Stock-Price Decline
Fundamental Price Level
Over-Reaction Triggered by Loss Aversion
Actual Price Level

13. Behavioural Explanations: Heuristic-Driven Bias
What’s the Answer?
Group A
Group B
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8
8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
= 512

14. Anchoring: Reference Point Distorts Conclusions
What’s the Answer?
Group A
Group B
1 x 2 x 3 x 4 x 5 x 6 x 7 x 8
8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
= 512
= 2,250
Actual Answer = 40,320

15. Consensus Growth-Rate Forecasts
Quintile Prior 3 Years Future Actual
Fastest Growth 1 20% 19% 11%
Slowest Growth 5 (1) 6 7

16. Value Investing Paradigm
Long-Term Earnings Power
Price Performance
Under-Estimation of Mean Reversion
Investment
Controversy
Analysts’ Forecasts
Stock-Price Decline
Research
Conclusion

17. Agenda What is Value investing? Why does Value investing work?
Is now the time to buy Value?

18. Has Value Run Its Course?
Cumulative Returns (US$) Mar 2000–Apr 2007
(Index)
MSCI World Value
Value Outperformance 35.4%
The degree of value’s outperformance since March 2000 is really quite remarkable
The MSCI World Value Index has returned 26.1% more than MSCI World on a cumulative basis
This translates into an annualized premium of 5.3%, helping to boost value’s long term annualized premium since 1975 to 1.6%
On the basis that all good things come to an end eventually , it’s little wonder that investors are nervous that value might soon begin to falter
MSCI World
Past performance does not guarantee future results.
*Annualized premium since 1975
Index = 100 at March 2000
Source: MSCI

19. The Value Opportunity is Lower Than in Past
Discount to Fair Value: Global Equities
Value Spreads Below Average
(%)
Oil
Shock
Japan Asset Bubble
Internet Euphoria
It’s not surprising, therefore, that value investors are getting a little anxious
Viewed through our own internal measure of the value opportunity, the outlook is not bright
This slide is one which I’m sure many of you are familiar with. It shows the amount by which the most attractively priced stocks within the global market sell below the aggregate market
Think of it as a gauge of investor sentiment. When the line spikes upwards, investors are usually anxious about something (even in the Internet bubble they were anxious…about the demise of the old economy)
At those extreme levels, valuations between stocks and sectors tend to vary quite dramatically depending on their exposure to the perceived problems
When the line falls, it usually reflects investors’ more settled frame of mind. Perhaps even complacency
As you can see, we’re currently right at the bottom of the historical range which, in simple terms, means that there are very few pricing discrepancies for us to exploit
Where, you may ask, is our outperformance going to come from in the future?
Average
Current valuations do not guarantee future results.
Through June 30, 2007
These data represent the amount by which the most attractively priced large-cap stocks within each market sell below overall market valuations. The proportion of Bernstein investments in stocks from this group will vary over time but will typically be high. Bernstein’s estimates of the fair value of these stocks may not be realized for a variety of reasons.
Source: Compustat, Datastream, DRI, FactSet, MSCI and AllianceBernstein

20. Value Outperforms Over the Long Run
Value vs. Broad Market Rolling 3-Year Annualized Comparison
Average
Through 31 July 2007
MSCI The World Index Value rolling 3 year annualized excess return vs. MSCI The World Index Core
Source: MSCI and Bernstein Value Equities

21. Rider
The information contained herein reflects, as of the date hereof, the views of AllianceBernstein and sources believed by AllianceBernstein to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in these materials will be realized. The views expressed herein may change at any time subsequent to the date of issue hereof. These materials are provided for information purposes only and under no circumstances may any information contained herein be construed as any sales or marketing materials with respect to any financial instrument, product or service sponsored or provided by AllianceBernstein or any affiliate or agent thereof. This document is not an advertisement and is not intended for public use or further distribution.

22. Knowing More…
Using Knowledge Better