Reese On The “Quality-Value Synthesis”

02-Dec-2014

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







Many of history’s best investors have been big proponents of investing in “quality” stocks — those that generate high returns on equity and assets, and strong, consistent margins. But Validea CEO John P. Reese says there is something very important to recognize when using quality metrics to pick stocks.

 

Reese writes in a column for Canada’s Globe and Mail that “a rather fascinating dynamic is at play within what I’ll call the ‘Quality-Value Synthesis’. It involves what happens when you separate the value and quality components [from an investment strategy].”Reeseites a research study from Research Affiliates that shows that the use of quality metrics by themselves does not tend to lead to higher stock returns. But, when quality metrics are applied to value stocks, they significantly enhance returns.

“Put simply, the Research Affiliates study found that investing in quality stocks is a winning formula — if you are looking at a universe of cheap stocks,” Reese says. “It’s not the only study to come to that sort of conclusion. In a 2000 research paper, for example, Joseph Piotroski, a professor at Stanford University (and another of the gurus I follow), found that low price-to-book ratio stocks outperformed the market as a group not because they were in financial distress and thus higher-risk, higher-reward plays (as many thought); instead the group outperformed because of a small number of big winners within it – which tended to not be in financial distress. Those big high-quality winners helped low-P/B stocks outperform the market as a group even though most low-P/B stocks were actually losers, Prof. Piotroski found.”

The bottom line, Reese says, is that most good strategies use both quality and value metrics. He offers 8 stock picks from the Canadian market that get high marks from his Guru Strategies because of their combination of value and quality.

http://theguruinvestor.com/2014/11/21/reese-on-the-quality-value-synthesis/

 


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