http://etf.com/sections/index-inves ... nopaging=1
This is a very interesting article. Larry starts out discussing a new four Factor model, the Q Factor model, which uses market beta, size, investment, profitability. This model subsumes value in the Fama French 3 Factor model, but doesn’t hurt to use value anyways. Larry reviews a study that looks at the explanatory power of investment and profitability in the corporate bond market. Profitability is negatively correlated with expected bond returns and investment is uncorrelated. This finding weakens the risk based explanation and strengthens behavioral explanations for investment and profitability in equity markets. Let me know if I have made any errors in my reading of the article. This material is at the fringes of my knowledge and understanding.
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This is interesting to me as I work my way through Tyler Cowen's "The Complacent Class". I just finished a chapter that presented evidence that highly profitable and dominant firms (IE high "quality") are increasingly difficult to knock from their perches. Microsoft certainly spent plenty of money trying to knock Google from its perch in search and Google spent plenty of money trying to knock Facebook from its perch. We know how both of those attempts went. Where I get confused a bit is the intersection between "growth" stocks and the Q factor. It seems like if companies are highly profitable with increasing profits their stocks would fit the definition of "growth" which generally hasn't been well rewarded? So, in summary other than "take your risks on the equity side" I don't find much actionable from this article.
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