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This Month Free Consultations.
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· The markets are remarkably efficient. You can learn this lesson from me, or the markets may teach you, but be prepared for an expensive tuition bill that comes with that knowledge.
· Embracing the efficiency of the markets embodies a “never-have-to-say-you are-sorry” philosophy towards investing, which can be pretty liberating.
· The future remains a mystery, and no one has a crystal ball. Hence, we should heed the wisdom of the Nobel Laureates, individuals I've had the privilege of knowing and respecting.
· Embracing the efficiency of the markets embodies a “never-have-to-say-you are-sorry” philosophy towards investing, which can be quite liberating.
· As a provider of capital, you have every right to expect the market return commensurate with the risk you undertake. This mindset allows everyone to thrive under the principles of capitalism, as there’s a positive expected return on capital for all participants.
The future is uncertain, and no one possesses a crystal ball. Therefore, we should listen to the wisdom of Nobel Laureates, whom I have had the privilege of knowing and respecting.
We do and have worked with Nobel Laureates to help put the correct portfolios together.
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Marx, “The Other Side of Value: The Gross Profitability Premium,” not only provided investors with new insights into the cross-section of stock returns but also led to the development of new factor models that incorporate a profitability factor.
Novy Marx's Findings
Before unpacking a more recent paper with new insights into how accruals and cash flows can impact profitability, I think it’s important to summarize some of Novy Marx's more fundamental findings on this premium:
• Profitability, as measured by gross profits-to-assets, has roughly the same power as the book-to-market ratio (a value measure) in predicting the cross-section of average returns.
• Surprisingly, profitable firms generate significantly higher returns than unprofitable firms, despite having significantly higher valuation ratios (for instance, higher price-to-book ratios).
• Profitable firms tend to be growth firms—they expand comparatively quickly. Gross profitability is a powerful predictor of future growth as well as earnings, free cash flow, and payouts.
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