In his book What Works on Wall Street, James O’Shaughnessy examined literally hundreds of strategies to see which really outperformed. He discovered that relative strength worked, as did some value strategies. Eventually, he settled on two strategies, Cornerstone Growth, which married value and relative strength, and Cornerstone Value, which used both value and high dividend yield. Since the book came out originally in the 1990s (the copyright on my copy is 1997), the skeptical folks at CXO Advisory recently examined how the strategies have performed since then.
The relative strength strategy has continued to shine. Cornerstone Growth has outperformed the market by about 5% per year over the 12-year period. This speaks to how adaptive and robust relative strength is. Cornerstone Value, on the other hand, has had a fall from grace. Even though it outperformed during the test period, in real life it has lagged the market by about 2% annually.
Third-party studies like this are quite important in separating fact from fiction in the investment world, and it is just more proof of the inefficiencies in the financial markets and the value of relative strength.
