A Lazy Investors Guide To Outperforming The Market

Abstract

Empirical studies from the 1960s and 1970s produced considerable evidence that the stock market is highly efficient in the sense that stock prices fully reflect publicly-available information. Investment strategies that are based on such information cannot outperform the market on a risk-adjusted basis. Several recent studies summarize a growing list of empirical evidence that the stock market may not be as efficient as we once believed. Three widely acclaimed areas of apparent inefficiency that predate the test period in this study include the low P/E effect, the small firm effect, and the incomplete incorporation of information in Value Line Timeliness rankings.

The intent of this paper is to encourage tests of the viability of simple investment strategies designed for small investors that utilize some combination of these inefficiencies.