Last Updated: 9/26/2023
Sometimes the best investing strategies don't come from the world of investing. Sometimes research that changes the investing world can come from the halls of academia. Partha Mohanram is a great example of this. While academic research has shown that value investing works over time, it has found the opposite for growth investing. Mohanram turned that research on its head by developing a growth model that produced significant market outperformance. His research paper "Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis" looked at the criteria that can be used to separate growth stocks that continue their upward trajectory from those that don't. Mohanram is currently the John H. Watson Chair in Value Investing at the University of Toronto and was previously an Associate Professor at the Columbia Business School.
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Validea used the investment strategy outlined in the paper Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis written by Partha Mohanram to create our P/B Growth Investor portfolio.
Mohanram's strategy starts with the lowest twenty percent of stocks using the book/market ratio (the inverse of the price/book ratio). Growth firms, on average, do not beat the market over time, but Mohanram identified eight criteria that can be used to separate the winners from the losers. His criteria are split into three distinct groups. His model looks at profitability using criteria like return on assets and cash flow from operations, consistency using the variance of return on assets and sales, and a willingness to invest for the future using capital expenditures, advertising and research and development. He found that, when combined together, these criteria helped to identify growth firms that are likely to sustain that growth.