Six Strategies That Beat the Market for more than 200 Years

Beating the market is easy in theory, but hard in practice.

Imagine what the world looked like in the year 1820…

James Monroe held office as the fifth president of a young United States of America.

Electricity, the telephone, air travel, and antibiotics had all yet to be invented.

And the average life expectancy hovered between 30 and 40 years.

But 200 years is how far back a trio of Dutch researchers looked at when they examined data to assess the success of various investment strategies.

Their conclusion?

A handful of investment strategies have beaten the market consistently over the past 200 years.

As they put it:

Global factor premiums [are] not driven by market, downside, or macroeconomic risks. These results reveal strong global factor premiums that present a challenge to asset pricing theories.”

Translated into English….

What you invest in matters far more than playing the never-ending macroeconomic chess game.

All this flies in the face of everything that is taught in Nobel Prize-winning theories of modern finance.

Strategies to Beat the Market

Truth be told, reading the Dutch group’s report is like stirring concrete with your eyelashes…

So let me spare you the pain of reading it by summarizing its conclusions.

After examining more than two centuries of international market data from multiple historical sources…

The report concluded that six popular strategies consistently outperformed over time.

Although these factors didn’t beat the market each and every year, they remained consistent in both good and bad times.

And contrary to what today’s finance professors tell you, these factors have demonstrated remarkable staying power.

The Big Six

With that, here are the six factors that have stood the test of time.

1. Trend Following

“Buy what’s going up… and sell what’s going down.” This commonsense approach was consistently the best-performing factor across all markets.

2. Momentum

A close cousin of trend following, momentum focuses on investing in assets that perform well relative to others.

3. Value

Cheap stocks outperform expensive stocks over time. This is the basis of value investing, as developed by Benjamin Graham in Security Analysis.

4. Seasonality

Certain asset classes perform differently at different times of the year. Notably, you can make most of your money in the stock market between November and May.

5. High Yield

Investing in higher-yielding assets makes you more money than investing in lower-yielding assets. Apparently, a bird in the hand is worth two in the bush.

6. Low-Risk Assets

Investing in low-risk assets delivers the highest returns over time. This finding directly contradicts the idea that high risk equals high returns. In a portfolio of investments, defensive stocks beat out speculative lottery tickets.

What Should I Do as an Investor?

Translating the conclusions of an abstruse quant paper into recommendations for a retail investor is a challenge.

Here are three takeaways.

1. For active investors, it pays to think beyond just investing in conventional index funds. History shows that the factors outlined above beat the market over time. And even a 1% or 2% annual outperformance can make a huge difference compounded over the long run.

2. Specifically, invest in trend-following, momentum, and value strategies Much of Wall Street dismisses trend-following and momentum investing as crass and simplistic. Yet these two strategies have generated the best returns over time.

3. Don’t give up on a lagging strategy. Strategies go in and out of favor. So don’t abandon value investing despite its poor showing since 2008. It will be back.

Reality Bites

OK, the conclusions are straightforward enough.

But implementing them in practice is hard.

First, I’ve found that, as a rule of thumb, any theoretical outperformance of strategy degrades by 50% once it gets implemented in the real world. A 2% per annum outperformance degrades to 1%- at best.

Second, the exchange-traded funds (ETFs) that seek to exploit these inefficiencies have lagged the market substantially since their inception. (I’ll spare their sponsors of the embarrassment of naming them.)

Sure, the history of these ETFs may be short compared to the 200-year pedigree of their investment strategy.

But just five years of underperforming a FAANG-heavy S&P 500 Index makes them a tough hold- let alone a new buy.

The key takeaway?

Finding a market-beating strategy in a sea of data is easy.

But it is hard to implement in practice.

As one of George Soros’ CIOs once observed:

”If beating the market were easy, meter maids would be doing it.”