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The Best Investment Strategy That Academics Discovered

There are three mainstream investment strategies that were discovered during the past three decades. The first one is investing in small cap stocks. This strategy has beat investing in large caps by 25 basis points per month during the past 85 years. The second strategy is value investing. Value stocks managed to beat growth stocks by an average of 39 basis points per month during the past 85 years. The third one is the best investment strategy that academics have ever discovered: momentum.

Between 1927 and 2011, momentum stocks outperformed non-momentum stocks by an average of 70 basis points per month. This is an amazing performance. Several legendary hedge fund traders discovered this way before than the academics but of course they didn’t advertise their discoveries. Between 1927 and 2011 momentum strategy yielded 75 basis points per month. Since 1991 it yielded 55 basis points per month.

Unfortunately this strategy performed horribly during the 2008-2009 crisis and as a result its average return is zero during the past decade. Between March 2009 and September 2009 this strategy lost 56%, which was an enormous underperformance. Since then things went back to normal though. Between October 2009 and April 2011 momentum stocks beat non-momentum stocks by 88 basis points per month.

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