In equities, value stocks - those on higher yields - have tended to outperform growth stocks, in violation of the simpler versions of the capital asset pricing model. In currencies, trade for years made money from carry trades - borrowing low-yielding currencies to buy high-yielding ones - thus contradicting uncovered interest parity. In corporate bonds, investors have often exaggerated default risk, with the result that higher-yielding bonds have outperformed lower-yielding ones. And in government bonds, upward-sloping yield curves tended for years to predict falls in longer-dated bond yields rather than rises, with the result that total returns on higher-yielding bonds beat those on lower-yielding ones, thus contradicting the expectations hypothesis of the yield curve.
Economists have long known about these ways in which naive investing - 'buy income' - has beaten the economics textbooks. But we have thought of them as separate anomalies. Until now. Research by Tobias Moskowitz at the University of Chicago and colleagues has found that they all have something in common.