by Michael Tarsala
Boring is beautiful, if you ask the guys at GMO Research.
The group found that that stocks with low debt, high profitability and stable earnings outperformed the market by an average of 0.7 per cent a year, going back to 1965. Meanwhile, low-quality stocks – high debt, low profitability and volatile earnings – underperformed by an average of 1.7 per cent a year.
You can read more about it here.
The upshot is that yes. Quality matters.
Over the long haul, an extra 0.7% could be very meaningful to your portfolio returns.
Even more important is avoiding the stocks that lag the market over time.
And yes, boring is just fine. Great, in fact. There is a good deal of academic research that says it’s the low-beta names that will outperform over the long haul. That flies in the face of the long-held theory that investors are paid to take on extra risk.
There is something else to consider too: The chart below comes from a detailed report from portfolio manager Pim van Vliet at Robeco:
Source: Robeco.com
Van Vliet’s chart shows the average compounded return of portfolios sorted by volatility and beta from 1931 to 2009.
Over that 80-year span, low-beta stocks offered better risk-reward ratios and a superior return versus high-beta stocks. It’ s a conclusion that flat-out contradicts the theory that risk and reward are correlated!
Others have observed this phenomenon, as well. Tadas Viskanta at Abnormal Returns dedicated an entire chapter to low-beta investing in his new book.
If you also think that boring is beautiful, you should talk to us at Covestor.
We have a collection of models focused on high-quality fundamentals and low risk ratings. And we can help you find the one that fits your investment goals.
