Investment Characteristics of Stock Market Winners
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.
In this article
- The Study
- Smart Money Variables
- Valuation Measures
- Technical Indicators
- Earnings and Profitability Measures
- Miscellaneous Variables
- A Test of Possible Screens
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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.
The companies chosen for the study were based on companies in "The Greatest Stock Market Winners: 1970-1983," published by William O'Neil & Co. To be considered a great winner, a company typically had to at least double in value within a calendar year, although there were a few exceptions to this guideline, and not all companies that doubled in value were selected. Historical fundamental and technical information on these firms was taken from the Datagraph books (also published by William O'Neil & Co. and sold primarily to institutional investors).
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