The authors argue that low-risk investing should focus on preserving business quality and earnings power rather than minimizing historical price volatility. They favor fundamental analysis of corporate profits, suggesting it provides a more meaningful forward-looking view of absolute risk than quantitative models built around a single statistical measure.
Profits for the Long Run: Affirming the case for Quality
GMO
Kim Mayer
Article
1 Pages
Key Takeaways
Unprofitable Firms Lag: Companies with negative net income underperformed the market by 8% annually across the 3,000 largest US companies.
Profitability Persists: Since 1966, companies ranked by return on equity generally remained within their profitability groups after 5 years.
Lower Risk Outperformed: From 1965 through 2011, low risk US stocks outperformed by 2.4%, while high risk stocks underperformed by 2.8%.
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