Abstract
The authors propose a conservative investment formula that selects 100 stocks based on three criteria: low return volatility, high net payout yield, and strong price momentum. They show that this simple formula gives investors full and efficient exposure to the most important factor premiums and thus effectively summarizes half a century of empirical asset pricing research in one easy to implement investment strategy. With a compounded annual return of 15.1% since 1929, the conservative formula outperforms the market by a wide margin. It reduces downside risk and shows a positive return over every decade. The formula is also strong in European, Japanese, and emerging stock markets, and it beats a wide range of other strategies based on combinations of size, value, quality, and momentum. The formula is designed to be a practically useful tool for a broad range of investors and addresses academic concerns about p-hacking by using three simple criteria that do not even require accounting data.
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