Academics have long known of dramatic price increases when a company unexpectedly releases news of windfall earnings. These same rising stocks can also collapse on surprise losses.
And like the impetus gained by a moving object these share price movements don’t stop.
They tend to drift upwards or downwards for weeks, months, or years ex-post facto in the U.S. stock market. An important recent article in the Journal of Financial Economics extends this knowledge to international stocks.
A team led by finance professor Brad Barber of U.C. Davis finds that international stocks offer higher returns in months of earnings announcements. Results are thought to be due to high price uncertainty as investors scramble to update valuations.
See Barber, Brad, Emmanuel De George, Reuven Lehavy and Brett Trueman. 2013. The earnings announcement premium around the globe. Journal of Financial Economics 108. 118-138.
Research spanned many countries but was the most significant in the United States, Japan, The United Kingdom, Australia, Germany, France, South Africa, and Switzerland.
Proven to Beat the Stock Market Averages
These new earnings announcement effects are compared to the three key strategies known to beat the market according to Fama and French (2012).
See Eugene Fama and Ken French. 2012. Size, value and momentum in international stock returns. Journal of Financial Economics 105. 457-472.
Eugene Fama is a finance professor from the Booth School of Business of the University of Chicago. He won the Nobel prize in economics for helping to clarify the Capital Asset Model which he used to prove the existence of the three important anomalies violating market efficiency.
Investors have long known that it is possible to beat the averages buying low capitalization “small” stocks.
This will allow you to beat the market by 1.2% per year. And is roughly equivalent to the dividend yield anomaly documented by finance professor Jeremy Siegel of the Wharton School of Business.
Everybody knows how hard it is to value invest the way Warren Buffet does. He takes huge positions that scare average investors.
Yet Main Street can easily value invest by seeking out cheaply priced stocks with high book value as compared to market capitalization.
This simple “value” strategy yields a much heftier 5.4%.
Yet it is the high priced stocks that keep rising that offer the biggest boost to your returns. “Momentum” is king.
The yield to momentum is the highest at 7.4%.
The 3 Key Ways Main Street 401(k) and Roth IRA Investors Can Beat The Market
The Barber et. al. (2013) study shows buying stocks in the month that firms are scheduled to release earnings beforehand yields nearly return as much as momentum. And the international returns are even higher.
| Anomaly | Abnormal Return |
| Size | 1.2% |
| Book-to-Market | 5.4% |
| Ex Ante Earnings Announcements | 7.2% |
| Momentum | 7.4% |
| Ex Ante International Earnings Announcements | 11.0% |
But is this new earnings anomaly anything that serious investors should pay attention to?
The really big money comes from sitting and doing nothing while riding large positions in long term price movements in uptrend. The problem with this new earnings based investing strategy is that it increases portfolio turnover as compared to long term value and momentum strategies.
And it increases trading frequency.
According to numerous studies increased trading frequency induces higher portfolio turnover and damages returns from high costs. And international stock markets have hidden costs as well as entry and exit trading frictions for U.S. investors that make the strategy even less tenable.
These two studies both reconfirm dominance of a U.S. domestic strategy of employing the power of value and momentum in your portfolio. But what does this say in terms of meaningful numbers for your family?
Professor Ken French reports the average return over the last twelve months on his Dartmouth University Data Library page (Rm-Rf Fama/French Research Factor 1 of 3).
Google Search: “Ken French Data Library” whenever you want to know what the correct market average benchmark is.
The last 12 month average return is currently 11.77% (but it may not be when you read this). This pushes the expected average return for value investors up to 17.2% for the fiscal year.
Top value investors such as Warren Buffet or Mohnish Pabrai can extract even higher returns as a skill premium.
Momentum investors looking back 12 months should be enjoying a 19.2% return. Rethink what you are doing if you are running well below.
| Anomaly | Abnormal Return | Rm-Rf | Total % Return |
| Size | 1.2% | 11.8% | 13.0% |
| Book-to-Market | 5.4% | 11.8% | 17.2% |
| Ex Ante Earnings Announcements | 7.2% | 11.8% | 19.0% |
| Momentum | 7.4% | 11.8% | 19.2% |
| Ex Ante International Earnings Announcements | 11.0% | 11.8% | 22.8% |
If you know these simple numbers you have a very nifty benchmark for your value or momentum returns at any point in time.
This is what Warren Buffet calls your internal scorecard.
The biggest step to building a large stock portfolio is believing. Hopefully these eye popping academic numbers will help.
To do so requires identifying rare situations in the stock market that give you favorable odds. The two key earnings studies above are signposts directing you toward investing in domestic U.S. value and momentum stocks for above average single stock investing returns.