QAULITY DIMENSION OF VALUE

INESTING
BY Robert Novy Marx
PRESENTED BY KAMAL SAEED
ID 5719580
 BENJAMIN GRAHAM IS ALWAYS REMEBERED AS FATHER OF VALUE INVESTING.
SELECTING STOCK ON BASIS OF P/E AND M/B RATIO.
GRAHAM NOT INTERESTING BUYING STOCK CHEAPLY BUT HE EMPHAZIED BUYING UNDERVALUE
FIRM HIGH QUALITY FIRM CHEAPLY
GRAHAM SET OF STANDARDS OF BUYING minimum quality in past performance and current
financial position of company,2. Minimum quantity in teams of earning and assets per dollar of
price.
7 criteria by GRAHAM 5 consisted of firms quality other two related with valuation.
 Previous research vastly concern of quality measures in value strategies.
Combining quality and value signals helps find stock that are both expected to grow and
reasonably priced.
Qaulity investing can be described as alternative implementation of value buying high quality
assets without paying premium.
This paper tries to find answer by assessing the performance of best known joint quality and
value strategy.
 Stock quality signal based on first five creiteria depends on its G-Score (Graham Score)
composite of Grahams Quality criteria. Firms G-Score gets one point if a firm current ratio
exceeds two, one point if net current assets exceed long term debt, one point if it has ten year
history of positive earning, one point if it has ten years history of returning cash to shareholder
and one point if its eps are at least a third higher scores signaling higher quality firms.
Graham Quality and Greenblatts Magic formula
Logic of Greenblatts is clearly that of combining quality and value in the spirit of Graham belief
in buying good firms at low prices. Formula by Greenblatts is ranking firm on ROIC and EY serves
as earning Yield.
Graham strategy Firms average ROE and Asset to equity and inverse of ROE volatility ranks
among all sotcks as quality signals.
Greenbelts Ranks firm on ROIC and EY also the ratio of EBIT to tangible assets (Net working
capital plus fixed assets and EBIT to enterprise value (market value of equity (including
preffered stock)plus debt]
Sloan Earning Quality measure
Blackrock (BGI) incorporating earning quality signals into value stragetys
Piotroski F score measure the financial strength another accounting measure based measurers of
firms quality F- Score summing nine binary variable includes elements of both Grantham Quality
and Sloan earning quality four of these variables are designed to capture profitability. Three of
these to capture liquidity and two of these to capture efficiency
Gross profitability
Why gross profitability? Before financial Economist believed that profitability shoult forecast
returns and was confused over ROE poor performance predicting cross sectional differences in
average stock performance
Economic predicts Value premium also predicts profitability premium suggest that quality and
value phenomena are two sides of same coin.
Spanning test
Incorporating momentum(price momentum CPM
anomaly)
Performance of stragety combines momentum with
quality (gross profit to assets and value (book to
market)