Investment success needs to be measured over fairly long periods of time, which is one of the many things that frustrates many individual investors. But there are a few criteria that investors might be able to search for during their due diligence process, to try to determine if a particular strategy has a decent shot at long-term outperformance. From The Market Predictor blog:
…people who have long term success in the markets tend to use little or no leverage, they take a holistic and complex view of the market, diversify, and are constantly adapting.
That’s a pretty crisp summary of what needs to be done. Some of the things, I think, tend to go together. You only bother to create an adaptive model if you see the market as a complex system rather than a simple input-output model. Leverage always seems to accompany blow-ups, whether of Long Term Capital Management, Lehman Brothers, or credit default swaps. Diversification is really just an admission that although you might be able to identify long-term return factors with success, you really can’t predict which individual assets will do the best. (If you could, you’d just buy the single best asset and you would have no need of diversification.)
Relative strength is the most universal and adaptive return factor we know. It works across markets and asset types, and has worked for long periods of time. If you diversify in a reasonable way and don’t overleverage, there is a good chance that you will do very well over time.
