Time to Change Your Investment Model

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Financial Analysts Journal
September 2017 | Vol. 73 | No. 4 | 11 pages
Source: CFA Institute
Feng Gu Baruch Lev

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Summary

We demonstrate empirically that the gains from predicting corporate earnings, or consensus hits and misses—an activity at the core of most investment methodologies—have been shrinking fast over the past 30 years. We identify the main reasons for this loss of earnings relevance and propose an improved alternative to current investment methodologies, one that focuses on the “strategic assets” of the enterprise and their contribution to maintaining the company’s competitive edge. We demonstrate this investment methodology using subscription-based companies.

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