Buying past winning stocks: easy and worthwhile
Written on February 15, 2008
Buying past winners in the stock markets sounds like a no-brainer, but this simple momentum strategy gives long-term returns at least twice as great as short-selling past losers, a study showed on Thursday.
Momentum trading, which involves investors following the trend of a particular stock, is often used by hedge funds and those focusing on quantitative strategies.
The study by the London Business School, sponsored by Dutch bank ABN AMRO (AAH.AS: Quote, Profile, Research) (ABN.N: Quote, Profile, Research), has found that buying stocks which gave the top 20 percent past returns in Britain gave a nominal annual return of 18.3 percent in the past 52 years.
This compares with a return of 6.8 percent for a strategy of short-selling stocks that gave the worst 20 percent returns 500 fast cash.
Researchers’ momentum strategies involved ranking stocks into winners and losers based on past returns over a 12-month period, buying the winners and short-selling the losers, holding them for one month until rebalancing.
Winners beat losers by 10.8 percent per year across the entire UK equity market from 1956 to 2007.
In the longer period, covering top 100 stocks over 108 years, the winners beat losers by 10.3 percent per year.
This means one pound invested at the beginning of 1900 in the winner portfolio would have grown to more than 4-1/4 million pounds, compared with 111 pounds in the loser portfolio, in nominal terms.
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