Anatomy of a Market Beater: Part II
In this series, I’ll be exploring whether there are any useful characteristics that separate stocks that beat a given benchmark index (“winners”) from those that lose (“losers”).
Suppose the benchmark index you are using is the NASDAQ.
Also, suppose that we are comparing stocks against the NASDAQ over a period of 365 days (the “test period”).
I ran 1,000 randomized trials on existing NYSE and NASDAQ stocks whereby for each trial: (1) a random date was chosen, (2) every existing stock was compared against the NASDAQ index over the period beginning with that random date and ending 365 days later. The stocks for each trial were grouped into either “winners” or “losers” depending on whether a stock’s overall growth over the 365-day period was greater (“winner”) or lesser (“loser”) than the NASDAQ.
The winners and losers were compared by days a stock would be beating or losing against the NASDAQ, the amount of that gain or loss (margin), and the absolute gain or loss that stock was experiencing.
Here’s what I found.
II. Gains of a Winner/Loser
For each trial, the gains over the 365-day period of each winner and loser was calculated.
In any given 365-day time period, the group of winners would tend to have a median gain of 33.8% while the losers group tends to have a median loss of -8.8%. This means that in any given 365-day time period, if we were to take all the winners of that period and calculate the gain of each stock in that group, the median gain of that winners group would fall somewhere between -2.6% and 97.5% (33.8% median), or for the losers, between -39.4% and 21.8% (-8.8% median):
Unfortunately, these median figures are not that stable to rely on: over 1,000 trials, the standard deviation in the median figures is around 19.5% for the losers and 31.3% for the winners.
Furthermore, the spread of values within a group is rather large: winner gains for a random one-year period exhibited a median, median absolute deviation of 39.6% while losers exhibited 18.6%:
Furthermore, to confuse the situation even more, the range of values for gains amongst winners versus losers show a wide overlap, meaning you cannot tell simply by the gain value whether it was a stock that beat the NASDAQ or not:
The worst that a winning stock ever performed over 1,000 trials was -21.4% while the best a loser stock performed was 57.4%. These figures are not that stable for either group as the standard deviation for minimum winner gains is 24.6% while the standard deviation of maximum loser gains is also 24.6%.
That must have been a particularly bad year for the NASDAQ for a winner with -21.4% growth to beat the NASDAQ or conversely a particularly good year for NASDAQ as the best loser still had a gain of 57.4% over the year!
So, looking solely at the gains of a stock is a poor tell-tale of its performance against the NASDAQ when all we are doing to separate the winners from the losers is whether its end of year performance is greater than that of the NASDAQ, because it could’ve beaten the NASDAQ by very little or by a lot, and it did not have to do this in a gradual fashion but could’ve occurred on the very last day of the period.
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