According to the analysis of DeBondt and Thaler, portfolio of the 35 biggest losers in a previous year outperformed the market by 30% after five years. It is interesting that the portfolio of the 35 biggest winners in a previous year underperformed the market by 10%. On the long run the winner portfolio will outperform the loser portfolio, but on the short run (three to five years) the loser portfolio will perform better. Therefore this strategy says: Create a loser portfolio and sell it after three to five years.
It is not entirely clear why this strategy works. Perhaps the reason is that those companies had "extremely bad luck", and that in the following years the "bad luck" will turn around. For a certain period of time the loser stocks will continue to lose, and the winner stocks will continue to win, but after that "the wheel of fortune" should turn around. Therefore, selling stocks in the first year is likely to generate a loss. If you might need that money soon, this is not a good strategy for you.
It is important to notice that the loser stocks are not losers without a reason, meaning that the loser stocks tend to have a greater risk. It is even possible that some loser stocks will cease to exist. Also they tend to have a low price, and therefore higher transaction costs, and higher transaction costs might turn this strategy unprofitable. It is important to find a balance between the risk, time available and the transaction costs.
It is not entirely clear why this strategy works. Perhaps the reason is that those companies had "extremely bad luck", and that in the following years the "bad luck" will turn around. For a certain period of time the loser stocks will continue to lose, and the winner stocks will continue to win, but after that "the wheel of fortune" should turn around. Therefore, selling stocks in the first year is likely to generate a loss. If you might need that money soon, this is not a good strategy for you.
It is important to notice that the loser stocks are not losers without a reason, meaning that the loser stocks tend to have a greater risk. It is even possible that some loser stocks will cease to exist. Also they tend to have a low price, and therefore higher transaction costs, and higher transaction costs might turn this strategy unprofitable. It is important to find a balance between the risk, time available and the transaction costs.
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