[[Start here]] → [[What works in stocks?|what works]] → [[expose to return drivers|drivers]] → good beats junk --- ![[diamond-junk.png]] Higher profitability stocks beat lower profitability stocks. This shouldn't be surprising. A profitable company makes profits that it can reinvest in its business. An unprofitable stock makes no profits and likely has to raise capital (equity or debt) to keep sustaining its business. It's intuitive to expect the profitable stock to outperform. But that's what is surprising. If everyone knows profitable companies are better investments than unprofitable ones, why wouldn't the profitable ones be so much more highly valued that the returns are equivalent? That's the efficient market right? Well it turns out that investors are far more likely to want stocks to double in a single year. As a result, long shots are in higher demand. Profitable companies tend to be stable, maybe likely to return 10% in a year, but not likely to double. As a result investors find them boring. Hence they tend to be undervalued for their quality. This is the source of their outperformance. Boredom creates the foundations for outperformance. I'll be expanding on this theme over time.