In The Long Term It Pays To Be Contrarian

I’m a subscriber to the The Economist. Being a libertarian, this is the best newspaper there is, even though it’s not perfect and over the years have become a bit more leftist (?). Still, I strongly recommend it. In the January 12th 2013 issue there is an interesting article on page 59 (I can’t find a link on the internet to it). The article refer to a study done by Lipper.

Lipper analyzed the records of British mutual funds over the past 30 years. They compared the records of the best performing, median and worst-performing British sectors over one-, three- and five-year periods.

Lipper conludes two things:

The first is momentum, the tendency for shares that have performed well to continue to do so. However, this force only works short-term. Buying a fund in the best-performing sector of the previous year earns a higher average return over the next year than either the worst or the median performer.

The second force is reversion to the mean, but this shows up over longer periods. Investors selecting a sector on the basis of its prior five-year performance would have earned much higher returns over the following five years by selecting the worst performing sector than the best. The gap is more than 30 percentage points!

The worst performing sector the previous 5 years is the property sector. Relying on the study that is the sector to invest now, perhaps quite attractive due to hedge against inflation.