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The markets are efficient. You can learn this from me. The markets will teach you a lesson. But the market sends out an expensive tuition bill. 1. Accepting that the markets are efficient. Is the never having to say your sorry approach to investing? 2. As a provider of capital, you are entitled to earn the market rate of return for the risk you take. With this approach, everyone should be able to win.

3. I do not know the future. I do have an opinion. Although I have an opinion, we should follow the accademics. 4. If you find someone who can do better than I do. You should use them because you don’t work for me. You work for yourself.

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.