It’s a fact that Wall Street professionals are horrible at predicting market performance from year to year. Yet, every January hordes of highly paid experts continue the annual tradition of predicting the market’s fate only to disappoint investors when the year comes to a close.
So, if we know Wall Street’s annual market forecasts are overwhelmingly incorrect, why do we continue to listen? Why not stick with tried and true MECHANICAL strategies that have outperformed the Wall Street professionals for years?
For instance, the Dogs of the Dow is a contrarian strategy that has outperformed the S&P 500, on average, by 1.2% a year for the last 20 years.
The 1.2% might not sound like much, but it equates to an extra 27.0% over the 20-year period.
The Small Dogs of the Dow, an alternative to the Dogs of the Dow, outperforms the S&P 500 by 2.9% a year on average, or 63.8% higher over a 20-year period. Those are real returns on mechanical approaches to the market. No predictions, no hype, just a simple approach that outperforms the market over the long term. It doesn’t get much easier.
My colleague Ian Wyatt stumbled upon another simple contrarian strategy that has outperformed the market over the past several years. He found that over the past four years the 10 worst-performing stocks in the S&P 500 were among the best performing stocks one year later. In fact, in the year after their big decline, the average S&P 500 loser gained 32.8%. That’s certainly a compelling track record compared with the S&P 500 index, which increased an average of 13.5% annually over the same time frame. (If you are interested in receiving his insightful report, click here.)
After reading Ian’s research I was curious to see if the worst performers carried over into sectors, industries and countries, specifically using ETFs.
What I found was astonishing…but the approach is slightly different from the previous examples.
I wanted to look at specific thresholds to see if they had any bearing on future returns. For example, if a sector was down 60% what was the average return over the next three years? Was it positive or negative? If positive, what was the average return?
Again, the results are interesting and could lead to a few actionable trades going forward.
As you can see in the table above, in most cases, the larger the decline the greater the return.
Of course, the greatest challenge as an investor is to have the nerve to buy something that has fallen 70%, 80% or 90%. But as history tells us, that is the best time to start adding positions. Some recent examples that come to mind are the tech sector in 2002, homebuilders in 2009, Greece in 2013 and now gold miners — specifically, the Junior Gold Miners.
I’m not going into the gold miners here. If you wish to read my article on what I think could be the next big investment and how I intend to take advantage of this rare opportunity click here.
Warren Buffet said it best, “Be fearful when others are greedy and greedy when others are fearful.”
His philosophy is timelessly profound and can be applied in any market. Because during times of heightened fear is when the best bargains can be found.
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