Winners Revert, Losers Revert—Granularity Matters

“Winners Repeat, Losers Repeat” (<xref>Brown 2022</xref>) made the case for tactical asset allocation (TAA) working at a certain asset class level—that is, for a particular level of granularity, such as US technology, China, 10-Year US Treasuries, and so on. It was suggested that the approach worked because the assets at this level of granularity exhibited sufficiently consistent trending. The success of well-constructed TAA portfolios—those targeting the optimal granular level and fueled by the incidence of trending—thus raises an interesting question: Could such an approach work for a finer level of granularity? The objective of this article is to determine whether such an approach works at the individual stock level. The authors approach this task by presenting a construction process that selects individual stocks based on their recent individual trending scores. In the previous study, the successful portfolio construction process overweighted recent winners and underweighted recent losers, based on the assumption of continued trending by asset categories at the described level of granularity. In contrast, this article evaluates portfolio construction that (a) overweights recent winners, (b) underweights recent losers, (c) underweights recent winners, and (d) overweights recent losers. The first two of these four, (a) and (b), are attractive in the presence of strong/consistent trending/momentum, whereas the last two, (c) and (d), thrive in the presence of strong/consistent reversion (essentially the opposite of trending/momentum), thus showing that individual stocks do not trend but instead revert. Moreover, even after the imposition of extreme transaction costs, an attractive level of outperformance remains.