Our long-time readers are familiar with the work of Professor Baruch Lev of the NYU Stern School of Business, whose research forms the basis for the Knowledge Leaders investment strategy. In his decades-long study of financial records, Lev first discovered a link between a firm’s knowledge capital and its subsequent stock performance, ultimately identifying a market inefficiency that leads highly innovative companies to deliver excess returns. We call this market anomaly the Knowledge Effect.
In a new article in Financial Analysts Journal, Lev and co-author Feng Gu continue to advance the findings on intangibles. The article, ‘Time to Change Your Investment Model,’ identifies that earnings prediction has lost ‘much of its relevance in recent years.’
As a form of predicting corporate results, ‘earnings no longer reliably reflect changes in corporate value and are thus an inadequate driver of investment analysis.’
The basis for this shift, the authors explain, occurred after the emergence of the semiconductor.
This post was published at Zero Hedge on Dec 7, 2017.