Despite the thousands of mutual funds and Advisors all purporting to offer a better approach to investing, it is universally acknowledged by practitioners and academics alike that two factors represent the most persistent and universal methods of capturing excess returns in markets:
- Value factor: Cheaper companies tend to outperform the market over the next 5 years or so.
- Momentum factor: Companies that have performed the best recently tend to outperform the market over the next few weeks or months.
The chart below shows how the portfolios created using the traditional Value and Momentum factors have delivered above-average returns versus a buy and hold portfolio over the period from 1927 through 2011. Note that the momentum portfolio delivers excess returns of 3.9% per year while the value portfolio beats by 2.1%.

The research clearly shows that the momentum anomaly offers the greatest opportunity for outperformance. Further, this anomaly extends outside stocks to asset classes and even residential real-estate. The following chart from our two-page report on momentum shows how holding the top 2 and top 5 asset classes (out of 10 global asset classes) based on recent price performance (momentum) crushes portfolios consisting of the bottom 2 and 5 asset classes.

Source: Yahoo Finance, Butler|Philbrick|Gordillo & Associates
The overwhelming challenge for most investors is that, while these factors obviously work universally over time, they do not work all the time. In fact, as the chart below clearly shows, each of these factors periodically under-performs over periods as long as several years.

Source: Kenneth French Data Library, Butler|Philbrick|Gordillo & Associates

Source: Dalbar, 2012

Source: Dalbar, 2012