In the modern financial market, many investors strive to keep up with the S&P 500 index. However, paradoxically, did you know that delisted stocks can often achieve better performance? This is not merely a matter of luck but is based on a strategy that has been validated over time.
Why Do Delisted Stocks Perform Better?
When a stock is delisted from an index, it may seem as though the company has been abandoned. However, this delisting can be the moment when the stock begins a new upward trajectory. When a stock is removed from an index, many funds automatically sell off that stock, causing a temporary drop in its price. This is where the opportunity arises. After the initial drop due to selling pressure, delisted stocks often experience a rebound.
For instance, stocks delisted from the S&P 500 have recorded an annual excess return of over 5% in the following five years. This occurs as the delisted stocks recover from their undervalued state after a large-scale sell-off. On the other hand, stocks newly added to the index often lose momentum quickly after an initial surge.
Tesla and AIV
When Tesla was added to the S&P 500 index in 2020, many expected the stock to continue rising. However, at the same time, Apartment Investment and Management (AIV), which was delisted from the index, surprisingly surged by 44%. This is a clear example demonstrating that delisted stocks can outperform newly added ones.
When the Era of Growth Stocks Ends
According to research by Arnott and Hensley, delisted stocks are more likely to outperform large indices when the dominance of growth stocks comes to an end. This could offer new opportunities for investors. Investing in delisted stocks can be a wise strategy that focuses on long-term value rather than short-term momentum.
Conclusion
Focusing on delisted stocks presents a fresh approach, distinct from traditional investment methods. This strategy is not based on luck but on extensive research and data over time. If you are feeling skeptical about conventional investment approaches, consider paying attention to delisted stocks. This could be your key to beating the S&P 500.
Reference: Fortune, “You can beat the S&P 500 with stocks that indexes dumped, market guru says”