Mebane Faber recently released a nice white paper, Relative Strength Strategies for Investing, in which he tested relative strength models consisting of US equity sectors from 1926-2009. He also tested relative strength models consisting of global assets like foreign stocks, domestic stocks, bonds, real estate, and commodities from 1973-2009. The relative strength measures that he used for the studies are publicly-known methods based on trailing returns. Some noteworthy conclusions from the paper:
- Relative strength models outperformed buy-and-hold in roughly 70% of all years
- Approximately 300-600 basis points of outperformance per year was achieved
- His relative strength models outperformed in each of the 8 decades studied
I always enjoy reading white papers on relative strength. It is important to mention that the methods of calculating relative strength that were used in Faber’s white paper are publicly-known and have been pointed to for decades by various academics and practitioners. Yet, they continue to work! Those that argue that relative strength strategies will eventually become so popular that they will cease to work have some explaining to do.
—-this article originally appeared 4/20/2010. Of course, the white paper is no longer new at this point, but it is a reminder of the durability of relative strength as a return factor. Every investing method goes through periods of favor and disfavor. Investors are, unfortunately, likely to abandon even profitable methods at the worst possible time. This paper is a good reminder that return factors are durable, but patience may be required to harvest those returns. Most often, the investor that sticks to it will be rewarded.