John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds.
Back on July 22, Morgan Stanley announced dreadful second-quarter 2009 results. Earnings per share were negative for the fourth straight quarter, and revenues were less than half of what they were a year earlier.
That same day, Apple posted glowing second-quarter results, with earnings jumping more than 60 per cent and revenue rising almost 30 per cent. In part because of those strong figures, Apple's stock went on to return 30.9 per cent in the next three months, about double the broader market's gains.
And Morgan Stanley? Despite the losses and revenue plunge, it gained a nearly identical 29.8 per cent over that same span.
The strong gains from two firms whose businesses were posting very different results is a great example of how a multitude of factors drive stock prices. In the short term, that makes it very difficult to predict the movements of a particular stock, or the market as a whole.
But what about over the longer term? What factors really drive equity prices over the long haul? And, perhaps most importantly, can we quantify them?
A new study from MSCI Barra, entitled "What Drives Long-Term Equity Returns?", attempts to do just that - and its findings might surprise you.
Barra (whose market indices are widely used by investors around the world) studied equity returns over the past 35 years in a variety of markets, and broke down those returns into several components. The major ones: inflation; real book value growth (i.e., how much the company's underlying business and assets grow); price-to-book growth (how the amount of money investors are willing to pay for every dollar of that book value changes over time); and dividend income.
