Top flop strategy
The top flop strategy is a simple investment strategy for stocks . It aims to achieve a better performance than the overall market, which is represented by an index , by selecting stocks based on their price development in the past .
method
According to the top flop strategy, on the first trading day of each year, the investor buys the five stocks from a stock index (for example the DAX ) that performed worst in the previous year. These shares are held until the end of June. On July 1st, investors switch to the five stocks that performed best in the first half of the year. The investment cycle begins again on the first trading day of the next year. The five shares held are always weighted equally. Apart from the two reallocations at the beginning and the middle of the year, no further transactions will be carried out.
background
The investment strategy is based on two unproven assumptions. First, the strategy is based on the assumption that the discounts on stocks that performed worst in the year-back view are usually exaggerated and that there is, accordingly, catch-up potential. Second, it is assumed that in the second half of the year managers of large equity funds will increasingly buy stocks that have performed well in the past six months in order to suggest to their customers that they have bought the right stocks for the fund. This would create additional demand for these stocks, causing their price to rise further.
success
Despite the unproven basic assumptions, the top flop strategy has usually achieved better results in the past than an uninterrupted investment in the overall market. If one considers longer investment horizons (e.g. 20 years), an outperformance of the strategy compared to the underlying stock index can be proven for a very large number of periods. A DAX portfolio built up since 1989 according to the top-flop strategy would have produced an annual return of 13.1% by 2013 , while an investor with a continuous investment in the DAX would have earned only 7.6% per annum .
However, this fundamentally positive balance should not be viewed as a guarantee of success.
First, the strategy aims only to outperform the underlying stock index. In other words, if a portfolio built up according to the top flop strategy loses less than the overall market, this negative result for the investor is rated as a success of the strategy.
Second, the strategy has only been able to show its superiority over the indices if it has been used for many years. With shorter investment horizons, there are often phases in which a portfolio built up according to the top flop strategy developed worse than the overall market.
Third, the advantageous nature of the strategy in the past is no guarantee of future developments.
Fourthly, unlike many other investment strategies, the top flop strategies do not attempt to reduce the volatility of the portfolio. For example, a DAX depot built according to the top flop strategy would have B. lost 42.3% in value in 2002, only to gain 40.0% in value in 2003. The investor is therefore exposed to extreme fluctuations in the value of his securities account, which can lead to real losses if the money invested is needed at an inopportune time.
criticism
The top-flop investment strategy was only able to statistically prove its advantages over longer investment periods . The reason given in the Background section why the strategy has been successful in the past is in no way scientifically substantiated and is also based on assumptions regarding the behavior of fund managers. If the reasoning is correct, a change in the fund manager's market behavior - possible at any time - would immediately render the strategy ineffective. As long as no scientifically verifiable cause for the functioning of the strategy has been found in the past, the question of whether the strategy can also be expected to outperform in the future cannot be answered seriously.