Which of the following is more likely to lead the NBA in scoring over the next couple of years?
Among the topics discussed in our recent white papers (here and here) is relative strength sensitivity. In other words, when selecting stocks, is it best to buy those stocks that have had the best relative strength over short, intermediate, or longer-term time horizons? Our papers pointed out that using a relative strength factor that focuses on relative strength over roughly the last 6-12 months when selecting stocks has led to the best long-term performance.
In a recent presentation, Mike explained stock selection within a relative strength model by comparing it to trying to identify those NBA players that are likely to be the highest scorers over the next couple years. One option would be to look at a player like Shaquille O’Neal who has averaged 24.1 points per game over his 18-year career. That is spectacular performance. However, this year he is only averaging 12 points per game for the Cleveland Cavaliers.
On the other end of the spectrum, you might reason that that player who scored the most points over the last week or month is most likely to be the best scorer in coming years. That might lead you to a player like J.J. Redick who just put up 23 points against the Nuggets, but who has only averaged 6.9 points over the course of his career.
Alternatively, one might select from among the list of players who have scored the most over the last year. The table below is for the 2009-2010 season:
It should make sense that if you use an extremely long time horizon to measure relative strength (Shaq) you run the risk of getting a stock that is running out of steam. If you use a very short time horizon to measure relative strength (J.J. Redick) you run the risk of getting a stock that happened to get a short-term pop, but may be unlikely to sustain that over time. However, using an intermediate-term measure of relative strength (Lebron) leads to those stocks most likely to be the best performers in the coming years.
