Key Principle No. 12

Fish in the best ponds, the role of academic research.

We believe that there are a few important things to learned from the work done by academic researchers. Most of what we find valuable is summarized in a very useful publication, “What Has Worked in Investing.”

Please take a few minutes to review this work. Focus on the magnitude by which value stocks outperfrom growth stocks in the long run. The results are truly amazing.

Consider this academic research to be a “fishing guide.” In general, the “ponds” of low price/book, price/sales, price/cash flow have many stocks that will provide above average returns. The growth stock ponds have far fewer good ideas.

Obviously, not every value stock will outperform every growth stock. However, in general it will be much easier to find top performing stocks in the ponds suggested by academic research.

Since most professional investors either completely ignore or totally dismiss academic research, the insights learned here can be an important advantage.

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