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Investment Characteristics of Stock Market Winners

by Marc Reinganum

Investment Characteristics Of Stock Market Winners Splash image

For many years, academic research supported the idea that investors cannot consistently outperform a simple strategy of buying and holding a diversified portfolio of common stocks without taking on greater risk. This implies that technical and fundamental research based on publicly available information would, at best, improve investment performance only marginally, and throwing darts to select stocks would most likely be just about as effective.

Serious chinks in this investment view have appeared recently, as several studies have found stock market anomalies—investment characteristics that consistently produce returns above those that would be expected based on the investment's level of risk. For instance, studies have indicated that stocks with low price-earnings ratios outperform those with high price-earnings ratios, and stocks with small market capitalizations outperform large-capitalization companies. Other anomalies characterizing peculiar patterns in the timing of stock returns also emerged, ranging from a month-of-the-year effect to a week-of-the-month effect to a day-of-the-week effect and even down to an hour-of-the-day effect. These anomalies point to a similar conclusion: Investors may be able to beat stock performance benchmarks using publicly available information.

Stock market winners may also yield some insights into anomalies. For this study, we singled out stocks with exceptionally high returns to see whether these firms share any common attributes. If history does repeat itself, these common attributes may suggest some profitable investment strategies.

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Marc Reinganum is the Phillips professor of finance in the College of Business Administration at the University of Iowa. This article was adapted from an article that appeared in the March-April 1988 issue of the Financial Analysts Journal.


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