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.
Quality 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 criteria 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 stocks 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 proffered
stock)plus debt]
Sloan Earning Quality measure
Blackrock (BGI) incorporating earning quality signals into value strategy's
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 should 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 strategy combines momentum
with quality (gross profit to assets and value
(book to market)
 Stragety based on either of values dimensions generate significant
abnormal returns but the real benefits of value investing accrue to
investors that pay attention to both price and quality.
Price signal helps investor to avoid good firms fully priced to avoid
buying Trading on both signals brings double benefit increasing
expected returns while decreasing volatility and drawdowns.
Cheap profitable firms tend to outperform that are just cheap or just
profitable. Quality tends to perform best when traditional value
suffers large drawdowns.
Gross profitability is vastly persistant
 Industry Capital intensity is positively correlated with value signals but
negatively correlated with profitablibility signals .

Joint quality and value strageties can be implemented effectively

while paying less attention to industry controls.
If Value investor do not take quality dimension of value that will bring
negative impact on their investment.