Investment predicts returns because, given expected profitability, high costs of capital imply low net present value of new capital and low investment, and low costs of capital imply high net present value of new capital and high investment.
Consumer demand drives the cash flows of consumer-oriented companies. Thus, they should serve as a reliable source of information to predict future fundamentals above and beyond the information contained in financial statements and readily available market data.
Jack Bogle, the founder of Vanguard, created a simple explanation for predicting future stock returns. The so-called “Occam's razor” (law of parsimony) approach is an [...]