HT: Falkenblog who quotes AQR's Cliff Asness as saying:Believe it or not, there could be a new holy grail for investors.![[image]](http://si.wsj.net/public/resources/images/BF-AE481_INVEST_G_20130301150532.jpg)
Christophe Vorlet
"Great ideas come along maybe once every 20 years or so," David Booth, chairman of Dimensional Fund Advisors in Austin, Texas, which manages more than $262 billion, told me this week.
Lately, he and other leading investors have gotten excited about a financial measure called "gross profitability" or "quality." The measure appears to identify companies that will earn even more money in the future. New funds are launching based partly on it. What should you know before you consider joining in?
Research to be published soon in the prestigious Journal of Financial Economics by Robert Novy-Marx, a finance professor at the University of Rochester, shows that bargain-priced "quality" stocks outperformed the overall market by more than four percentage points annually between 1963 and 2011. This stunning margin is even higher than that earned over the same period by traditionally measured cheap "value" stocks, but usually with less severe losses in market downturns. Quality also tends to do well when value does poorly—and vice versa.
"There's something there, and I don't think it can be ignored," says William Bernstein, a money manager and investment theorist at Efficient Frontier Advisors in Eastford, Conn. "We don't know exactly why it works, but it works."
Most investors zero in on the bottom line: a company's net earnings. But here, it is what is near the top line that matters: total revenues minus basic expenses. When a company's goods and services take in a lot more money than they cost to produce, that is a high gross profit margin—and a strong signal of quality....MORE
- Cheap stocks beat expensive stocks
- High carry beats low carry
- Low risk beats high risk
- The trend is your friend
again HT: Falkenblog
