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11-28-2021: Best Performing Investment Strategy for past 200 Years!

Updated: Nov 29, 2021

[Excerpts from an article written by John Authers with Bloomberg] A group of quants at Robeco Groep, the Dutch investment house, have produced research into the global performance of stocks, bonds, currencies and commodities going back to 1800. The numbers they processed all came from the enormous data set built by Global Financial Data.


The study tracks the performance of six different factors that have been claimed by the preponderance of academia to outperform the market in the long term:

  1. Momentum (winning stocks tend to keep beating stocks that are losing),

  2. Trend (securities that do well in absolute terms tend to keep doing well),

  3. Value (stocks which are cheap compared to their fundamentals tend to do well),

  4. Carry (securities that pay out a high income do well),

  5. Seasonality (a much more recent factor to show up in the literature, which involves buying at times of the year when stock performance tends to be good), and

  6. “Betting against beta,” which is that relatively low-risk stocks tend to outperform in the long run.

You might be surprised at the results...


Attempts to discover new investment strategies have generated hundreds of "can't miss", "how to beat the market" methodologies. Many of these turn out to have been “data-mined,” which means honed to curve-fit the experience of the last few years, and lose effectiveness soon after they are published.


However, some investment strategies appear to stand the test of time and have a meaningful effect over the past 200 years.


Two of those strategies include:

  1. Quant-based trend analysis, and

  2. Seasonality-based analysis.

The study concludes: "Over the past two centuries, trend-following worked better and more reliably than any other factor, with a strong and consistent risk-adjusted return. Further, the trend factor tends to subsume the “momentum” factor, which involves looking for stocks that perform well relative to others. That implies that there may be more significance in technical analysis — looking for patterns and trends in charts — than academics tend to admit."


In other words (Dr. Siegel, Mr. Buffett, Mr. Cramer, et al) deciding what to buy, when to buy and when to sell, based primarily on company fundamentals produces far lower returns and incurs far higher risk than making those decisions based on a quantifiable trend-based analysis.


To put it even more simply... Buy-and-Hold strategies based on company fundamentals does NOT stand the test of time, performance and risk mitigation, nearly as well as trend-based investment strategies. Buy-and-hold strategies have virtually unlimited downside risk; whereas sticking to trend-based analysis of pricing movement over time produces better returns at significantly less risk.


The study also gives high marks to seasonality analysis, coupled with trend-based investment strategies.


I am delighted to see such an exhaustive study confirm that our focus on quant-based trend and seasonality analysis algorithms is the best approach to making long-term, consistent risk-adjusted returns.

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