David Larrabee, Director of Member and Corporate Products at CFA Institute, gave investors an insider’s thought from the 69th CFA Institute Annual Conference in his latest article. Empirical data suggests that there are a number of opportunities for disciplined investors to take advantage of market anomalies in a “meaningful and profitable manner”. Larrabee reminds investors of the macroeconomic picture by discussing chief strategist at BCA Research Peter Berlin’s key advice of what to do in the face of these anomalies:
- Low beta:Despite the CAPM telling investors that high-beta stocks offer higher expected returns, high-beta stocks have historically not outperformed the broader market and low-beta stocks have outperformed.
- Small cap:Small-cap stocks (US) have outperformed their large-cap peers by an average of 2.7% per year since 1926.
- Value:Value stocks are too often mislabeled as “distressed” companies and are not always more risky because they tend to do best in weak markets.
- Wall Street research:Forecasting earnings with any degree of precision is futile. But, when an analyst issues a “sell” recommendation on a small-cap stock, it pays to listen. Similarly, stocks that have been recently upgraded tend to outperform those that have recently been downgraded.
- Insider ownership:Insider activity is worth paying attention to and combining short interest produces an even stronger signal for investors. The best returns are from “companies whose insiders are buying and short interest is decreasing.”
- Momentum:Momentum seems to work best when viewed over a 12-month period. Reversals are typically seen in short-term (one-month) and long-term (five-year) periods.
- Volume:Low-volume stocks tend to outperform high-volume stocks.