1. What If You Always Invest in Last Year’s Best Stock?
What if you follow one simple investment rule every year? Instead of trying to find the next big stock, you simply invest in the stock that performed the best in the previous year. For example, if ABC stock gives the highest return in the first year, you invest in ABC in the second year. Then, at the end of the second year, you find the best-performing stock and invest in that stock for the third year. You keep repeating this process every year. It sounds like a very simple strategy, but the results are quite surprising.
2. Turning $100 Into $176,000
A study looked at what would have happened if an investor had followed this strategy for 15 years in the US stock market. The results were impressive. An investment of just $100 would have grown to around $176,000 by simply investing in the previous year’s best-performing stock every year.
In comparison, the same $100 invested in the S&P 500 would have grown to only around $800. The difference is huge. The strategy delivered an annualised return (CAGR) of 65.9%, while the S&P 500 delivered around 15% during the same period.
3. The Strategy Also Worked in India
A similar approach was tested in the Indian stock market using Nifty 200 stocks. Here too, the results were better than simply staying invested in the index. An investment of ₹100 in the Nifty 200 would have grown to around ₹490. However, by investing in the stock that performed best in the previous year, the same ₹100 would have grown to ₹1,182.
This shows how powerful a simple strategy of following the previous year’s market winner can be. Both in the US and India, this approach managed to beat the broader market by a big margin.
4. But There Is a Big Risk
However, these numbers do not mean that the strategy has no problems. In fact, there is one major risk. A stock that performs extremely well in one year may perform very badly in the next year. This can lead to very large falls in the investment value, also known as drawdowns. While the previous year’s top-performing stock managed to beat the market in 11 out of the 15 years, there were still years when the strategy did not work. Investors must be ready for such ups and downs before following this approach.
5. Is It Really Possible to Follow This Strategy?
There is another big problem with this strategy. It requires putting all your money into just one stock, which was already the biggest winner in the previous year. While this may look great when we study past market data, doing it in real life is extremely difficult. Imagine investing your entire savings in a stock that has already gone up sharply. What if it suddenly starts falling? Most investors would find it very difficult to stay invested. So, although the strategy looks excellent on paper, following it in real life is a completely different challenge.
6. The Power of a Simple Investment Idea
The biggest lesson from this strategy is that sometimes even a very simple investment idea can produce surprising results. You do not always need a complicated system to beat the market. However, past performance does not guarantee future returns, and a strategy that looks great in historical data may not be easy to follow in real life. The key is to understand both the potential returns and the risks before putting your money into any investment strategy.
