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Jeremy Grantham, founder of investment management firm GMO, has predicted a 50% fall in the U.S. stock market, as revealed in a recent Bloomberg podcast interview. The veteran investor cautioned against overvalued U.S. stocks and instead recommended high-quality stocks, characterized by high returns on equity, stable earnings, and low debt.
Backing Grantham’s assertion, data from MSCI and AQR hedge-fund companies indicates that these quality stocks have consistently outperformed the broader market in the U.S., Europe, and Japan since the mid-1970s. This trend has been observed during significant market downturns such as the global financial crisis of 2007-09, the bear market of 2000-03, and the Japanese bear market in the 1990s.
In contrast, companies like Lehman Brothers, Bear Stearns, and Countrywide Financial that did not meet these high-quality criteria have collapsed during these turbulent times.
The success of Warren Buffett is often attributed to his focus on quality stocks. His $120 billion fortune is largely due to this investment strategy.
For investors interested in following this approach, funds like MSCI U.S.A. Quality Factor ETF (NYSE:QUAL) and iShares MSCI International Quality Factor ETF (NASDAQ:IQLT) offer opportunities to invest in high-quality stocks.
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