- Stocks that performed badly last month tend to do well over the following month.
- Industries that outperformed over the last few months tend to continue to outperform.
- Some stocks tend to do well in certain months of the year. For example, Florida-based insurance companies have historically underperformed the market in the summer months when Atlantic hurricanes tend to form, causing losses to the insurers.
Trading these patterns has historically been profitable to the tune of 12% per year.
Looking at the distribution of these profits over time (figure 2 in the paper linked to above), we can see an interesting pattern.
Profits were high and stable from 1985 to 2002. From 2002 to 2014, profits were stable, but significantly lower. Since 2014, the strategy has generated almost no profits.
This is because competition in the markets has increased. If a strategy is published, investors start to trade it and the profits from it diminish or disappear. Strategies that once worked, no longer work.
Because of this increased competition, a successful investor cannot base their strategy only on published results, but must think creatively about what kinds of mistakes other investors might be making today. These mistakes change over time and therefore strategies, too, must keep evolving.