The Bear of Beacon Hill has spoken — and on one thing specifically, history says he is probably right.
But it’s Grantham’s third call that is most interesting, especially to anyone trying to save enough to retire on someday.“When it comes to quality, they have less risk of every kind, they have less debt, they go bankrupt less, they have less volatility, they have a lower beta. … That is a free lunch,” he said.
Not every financial expert agrees with this, incidentally. Many question whether company quality is really any kind of reliable indicator of stock-market outperformance. There has been a trend in academia to suggest that many of these so-called investment factors are bogus, the product of data mining, p-hacking , publication bias and other sins.
The proof of a free lunch, surely — like the proof of a pumpkin pie, an allegedly $5.5 billion fake-meat sandwich or pretty much anything else — is in the eating. Factoring in dividends as well, from 1994, quality stocks have beaten the overall stock market by 1.5 percentage points a year in the U.S., by 1.9 points a year in Japan and by 2 points a year in Europe.
In MSCI’s data, the outperformance of quality has been persistent, but not consistent. It has lasted over long periods of time. But it has not shown up every month, or every year. There have been several years at a time when quality stocks have done worse than the overall market. Finance is not a natural science like physics, no matter what the professors like to claim. This water does not always boil at 100 degrees Celsius at one atmosphere.