This is possibly one of the simplest investment strategies ever devised. It is also one of the most profitable. You just need to buy the 10 worst-performing stocks in the S&P 500 index (using their price performance over the previous three years) on 1 October each year. Hold these shares for only three months until 31 December and then sell them.
That's it. You don't even have to pore over the finer details of fundamental analysis used by stockbrokers and equity analysts when deciding on the 10 shares to hold. So, forget about dividend yields, price-to-earnings multiples and price-to-book values (the ratio of a company's market value to its net asset value). This strategy does not rely on any of these valuation measures to work.
And work it certainly does: if you had followed this strategy in the past decade, you would have turned in an average quarterly gain of 23 per cent. That's over 15 percentage points more than a S&P 500 index tracker made in the final three months of the year.
Why does this trading strategy of buying the worst-performing stocks in the S&P 500 index work so well? One reason is that share prices always overreact to bad news as well as good news. Companies that have bad reputations are often shunned by new and existing investors alike, and their share prices languish as a result. Another is that the US fiscal year ends on 30 September, so fund managers tend to 'window-dress' their portfolios towards that date, selling anything that hasn't performed up to scratch. Finally, and most fundamentally, poorly performing shares carry lots of risk - and therefore lots of potential reward. It's for this reason that you must buy all ten shares, not just one or two. The chances are that most of any subsequent outperformance will come from one or two recovering spectacularly, while the rest plod on or fail altogether.
