Relative Strength vs. Value – Performance Over Time

Thanks to the large amount of stock data available nowadays, we are able to compare the success of different strategies over very long time periods. The table below shows the performance of two investment strategies, relative strength (RS) and value, in relation to the performance of the market as a whole (CRSP) as well as to one another. It is organized in rolling return periods, showing the annualized average return for periods ranging from 1-10 years, using data all the way back to 1927.

The relative strength and value data came from the Ken French data library. The relative strength index is constructed monthly; it includes the top one-third of the universe in terms of relative strength.  (Ken French uses the standard academic definition of price momentum, which is 12-month trailing return minus the front-month return.)  The value index is constructed annually at the end of June.  This time, the top one-third of stocks are chosen based on book value divided by market cap.  In both cases, the universes were composed of stocks with market capitalizations above the market median.

Lastly, the CRSP database includes the total universe of stocks in the database as well as the risk-free rate, which is essentially the 3-month Treasury bill yield. The CRSP data serves as a benchmark representing the generic market return. It is also worthwhile to know that the S&P 500 and DJIA typically do worse than the CRSP total-market data, which makes CRSP a harder benchmark to beat.

 

Source:Dorsey Wright Money Management

The data supports our belief that relative strength is an extremely effective strategy. In rolling 10-year periods since 1927, relative strength outperforms the CRSP universe 100% of the time.  Even in 1-year periods it outperforms 78.6% of the time. As can be seen here, relative strength typically does better in longer periods. While it is obviously possible do poorly in an individual year, by continuing to implement a winning strategy time and time again, the more frequent and/or larger successful years outweigh the bad ones.

Even more importantly, relative strength typically outperforms value investment. Relative strength defeats value in over 57% of periods of all sizes, doing the best in 10-year periods with 69.3% of trials outperforming. While relative strength and value investment strategies have historically both generally beat the market, relative strength has been more consistent in doing so.

21 Responses to Relative Strength vs. Value – Performance Over Time

  1. […] the 1930s.  Once again we’ve used the Ken French data library and CRSP database data.  You can click here  for a more complete explanation of this […]

  2. […] past posts (“Relative Strength vs. Value-Performance over Time” and “Relative Strength, Decade by Decade”), I’ve used the Ken French database’s relative […]

  3. […] active management is only a success if it outperforms in each 12-month period.  I know of a number of return factors that have outperformed over time, but I know of nothing that outperforms in every single period.  In related news, Michael Jordan […]

  4. […] active management is only a success if it outperforms in each 12-month period.  I know of a number of return factors that have outperformed over time, but I know of nothing that outperforms in every single […]

  5. […] of Ken French’s High Relative Strength Index (an explanation of this index can be found here) against 50 and 200 day moving averages.  We’ve calculated returns based on the assumption that […]

  6. […] of Ken French’s High Relative Strength Index (an explanation of this index can be foundhere) against 50 and 200 day moving averages.  We’ve calculated returns based on the assumption that […]

  7. […] from lowest to highest.  We then used Ken French’s high relative strength database (explained here) to determine the average percentage of growth 3, 6, and 12 months […]

  8. […] to say that relative strength is a panacea.  That said, there is solid research that shows that relative strength has been an effective way to beat the market over time.  Furthermore, the index construction process ensures that the process seeks to identify […]

  9. […]  Both of these strategies have consistently outperformed the stock market over the last 90 years (click here). […]

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