Last week’s talk by Edward Altman at the 50-year anniversary of Altman’s Z-score event at the CFA New York inspired me to compile an expanded list of memorable inventions in equity analysis. Each one is a successful blend of quantitative and fundamental thinking - which is increasingly being called ‘quantamental investing,’ for example see here and here. I am inspired by this list, especially if I imagine investing in a world without this knowledge.
DuPont Formula (Donaldson Brown, 1918)
Value Investing (Benjamin Graham and David Dodd, 1928)*
Dividend Discount Model (John Burr Williams, 1938)
Gordon Growth Model (Myron J. Gordon and Eli Shapiro, 1956)
Price to Earnings (Francis Nicholson 1960)
Equity Beta (Jack Treynor, 1961 and William F. Sharpe, 1964)
Altman Z-score (Edward I. Altman, 1968)
Earnings Surprise (Ray Ball and Philip Brown, 1968)
PEG Ratio (Mario Farina, 1969 and Peter Lynch, 1989)
Tobin’s Q (Nicholas Kaldor, 1966 and James Tobin, 1977)
Sustainable Growth Rate (Robert C. Higgins, 1977)
Ohlson o-score (James A. Ohlson, 1980)
Price to Book (Dennis Statman, 1980)
Size Effect (Rolf W. Banz, 1981)
P/B-ROE model (Jarrod Wilcox, 1984)
Price Momentum (Narasimhan Jegadeesh and Sheridan Titman, 1993)
Accruals (Richard Sloan, 1996)
Piotroski F-Score (Joseph Piotroski, 2002)
Magic Formula (Joe Greenblatt, 2005)
Contextual Fundamentals (Eric H. Sorensen, Ronald Hua, Edward E. Qian, 2005)
This list of beautiful ‘classics’ demonstrates that quant and fundamental investing can and has been successfully combined for at least a century and that quantamental approaches can work despite their challenges. Of course, some of these approaches did not survive empirically until today, making their way into the factor museum. However, many of them are still used to manage trillions of dollars - and hence the cumulative impact of this innovation is large.
Here is a Benjamin Graham’s quote that points to the early evolution of quantamental investing:
“The new-era investment theory was conspicuously reticent on the mathematical side. The relationship between price and earnings, or price and trend of earnings was anything that the market pleased to make it. If an attempt were to be made to give a mathematical expression to the underlying idea of valuation, it might be said that it was based on the derivative of the earnings, stated in terms of time.
In recent years more serious efforts have been made to establish a mathematical basis for discounting expected future earnings or dividends. The latter work is built on the premise that the value of a common stock is equal to the present value of all future dividends. This principle gives rise to an elaborate series of mathematical equations designed to calculate exactly what a common stock is worth, assuming certain vital facts about future earnings, distribution policy and interest rates.” - Benjamin Graham Security Analysis, 6th ed.
Which quantamental inventions from the past did I miss?
And how will quantamental innovation look over the next 50 years?
*The earliest mention of Value Investing is by Van Ketwich in the 1799 prospectus of the world’s first actively managed mutual fund (Dutch’s “Concordia Res Parvae Crescunt”) as described in Concise Financial History of Europe 2018 by Jan Sytze Mosselaar.