Market winners outperform losers again


In the spirit of recognising the many different ways in which you can pick stocks, I wrote an article two years ago about using a basic momentum strategy. I will update this article annually (last year’s is here). The premise is as follows: academic researchers found that the portfolios of recent stock market outperformers subsequently outperformed portfolios of recent underperformers. A long/short equity strategy constructed this way should generate a positive return. We applied this theory to the Australian marketplace and found a volatile but high-performing strategy. So how did it perform in the past financial year?

2015-16 performance

A brief refresher on the strategy, noting it is paper-based and theoretical:

  • At the start of each financial year I go long an equally weighted portfolio of the previous financial year’s top 10 performing stocks on the ASX 200
  • I also short an equally weighted portfolio of the previous financial year’s worst 10 performing stocks on the ASX 200
  • I hold this portfolio for the subsequent financial year (12 months).

The table below lists stocks I would have held, long and short, purchased from the end of the 2014/15 financial year. It is based on their performance over the past 12 months, along with their subsequent performance.


If I subtract my short performance (+3%) from my long performance (+40%), I have a total paper portfolio performance of 37%. However, it would definitely have been a rollercoaster year if you closely followed each stock (imagine being short RSG as it rallied 321%).

The past financial year was good for this strategy, above its long-term average. The chart below presents the updated track record (now 12 years).


Source: Thanks to Acadian Asset Management (Australia) for the data.

The performance numbers above only focus on the active return piece and leave out cash returns, stock borrowing fees and transaction costs (in theory, if I am long and short the same dollar amount of stocks I have 100% of my portfolio size earning cash returns). Stock borrow fees can be high for stocks that have performed poorly and this would dilute the strategy’s returns.

This article annoys some people

Each year I write this article, it seems to annoy people. The comment below is typical:

“Looking at any strategy without considering its actual cost and the ability to implement suggests to the reader that there are larger gains to be made than would exist in practice. Could all of the stocks actually have been borrowed, and what was the cost of borrow? Would any of the (very large) individual short positions (or even the entire short portfolio) pose a problem during a counter-trend short covering rally?” – Jerome Lander

This has always been a paper portfolio and never recommended as an investment strategy. It originates from academia and historically academics have failed to incorporate transactional expenses (though this is changing). And yes, the strategy relies on you not looking at your portfolio during the year because the ride is volatile.

So what’s the point?

The article illustrates a behavioural bias that exists in financial markets. Cuffelinks often has references to behavioural biases but rarely are these biases presented in a worked example that leaves you scratching your head and asking, ‘Is this possible?’. If markets were perfectly efficient, then simple rules-based strategies like holding past winners and selling short past losers would not generate outperformance.

Additionally, this article is an annual reminder that there are many different ways to pick stocks. Some are based on company analysis, some are technical, and some are behavioural. You need to pick the approaches you believe you can execute well, understand the strengths and weaknesses of your approach, and the environments where it will work. Cuffelinks publishes many articles on fundamental investing but less on technical approaches which account for behavioural biases.

Finally, it is relevant to reflect on what biases may be embedded in your own investment strategy. When I reflect on the winners versus losers anomaly, I find myself wondering if I am not open enough to the possibility that stocks and markets can experience a significant event that leads to consecutive years of outsized performance (positive or negative). If I have a mindset that I have missed this opportunity or that everything will bounce back (mean revert) then I have potentially hard-wired myself to not being open to important developments at a company, sector or market level which may have longer-lasting effects. I might feel I have missed an investment opportunity because it has already had a run, when in fact it may still have significant further upside.

You can have the best valuation model but if it is not populated with well-considered, unbiased inputs then it may not be successful.


David Bell is Chief Investment Officer at Mine Wealth and Wellbeing.  He is also working towards a PhD at University of NSW. This article is general information and does not consider the circumstances of any individual.

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5 Responses to Market winners outperform losers again

  1. Graham Hand September 19, 2016 at 3:05 PM #

    Hi Ken, here’s an article with the answer (although noting we are not recommending the strategy, it is a theoretical exercise).

  2. Ken September 19, 2016 at 2:38 PM #

    As a new subscriber I was most impressed with this article on the top 10 performing ASX200 stocks and how they performed the following year.
    Do you have or know where I can get the names of the top 10 performing stocks for the year ending June2016?

  3. David Bell September 9, 2016 at 8:46 AM #

    Hi Jerome,

    Always appreciate your comments – you add value to readers of Cuffelinks. And credit for actually commenting under your own name. Please don’t stop!

    Given the way that I worded the article it may not surprise you that I am a strong believer in diversification – in this case investment styles (but also markets, return drivers, risk factors etc). So we do have exposure to the momentum factor in some of our stock selection strategies, but it is far less crude than the analysis I have been presenting on this topic each of the last few years. All this analysis is meant to do is create thought and reflection.

    As for my own money, all my super goes into Mine Wealth and Wellbeing. I don’t have a SMSF – I direct all my efforts at the fund (and where possible try and share relevant thoughts with the broader industry) and I want to create maximum alignment between me and the members who I manage money for.

    Cheers, Dave

  4. Jerome Lander September 8, 2016 at 3:30 PM #

    It is certainly good to see you appear to be an advocate of thoughtful active investing. Why anyone would believe not thinking about what they’re doing, and simply trusting in the market to provide a return to them (rather than a diligent manager or strategy) is quite amazing.. Of course certain financial “education” encourages people to believe in false concepts, so that probably explains it and many other biases. Having an education beyond finance helps see the flaws in a “financial education”.

    David, I wonder whether you currently use a strategy like this in your institutional CIO role – it is cheap after all? If not, why not? So many super fund executives actually invest the bulk of their own superannuation money elsewhere through a SMSF, which I find particularly interesting but not surprising – there are after all better options out there and the insiders should know, given all the flaws that impede big institutions from investing well. Readers might reconsider where they put their money if they knew all the issues.

    David, I rarely get quoted as making mainstream or typical comments and then having my comment quoted in the f/up article, so that’s a first! By no means has yours been the only Cuffelinks article to have “issues” in my humble opinion, and I have grown a little weary of making (hopefully) informative comments so don’t expect to hear too much from me :-0

  5. Ashley September 8, 2016 at 1:35 PM #

    Good to disclose it is a theoretical paper trading portfolio and not real money. There are oodles of inefficiencies to exploit – but few work after brokerage, spreads and tax – especially the horrendous spreads small individual investors suffer.

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