Decades of academic research have produced hundreds of stock-picking strategies that once appeared to outperform the market, but recent analysis suggests that these classic investment signals now generate negligible returns. According to a study by Ivo Welch, a finance professor at UCLA’s Anderson Graduate School of Management, the historical advantage of widely known stock selection rules has largely disappeared in today’s markets.

Welch, along with Federal Reserve economist Andrew Chen, examined roughly 200 stock-picking signals documented in leading finance journals dating back to 1973. Their research, detailed in a July working paper, evaluated the effectiveness of these investment criteria by simulating portfolios that buy the cheapest stocks and short the priciest ones, based on various valuation metrics or other financial indicators. Using extensive historical data on stock prices and fundamentals, they quantified the average returns of such strategies before and after significant market changes.

Their findings reveal a stark decline in profitability starting around 2005, a threshold chosen to reflect key industry developments such as the transition from fractional to decimal stock pricing and the proliferation of high-frequency trading firms. Prior to 2005, these investment signals could have delivered excess returns of approximately 0.5% per month on a long-short portfolio basis. Since then, average monthly returns associated with these signals have fallen to below 0.2%, and when excluding the smallest, most illiquid micro-cap stocks—which are difficult for investors to trade in meaningful volumes—the returns drop further, to roughly 0.07% per month, or 0.84% annually.

The researchers caution that these figures precede trading costs, which, despite the era of zero commission trading, remain a significant drag on net returns due to bid-ask spreads and market impact. Welch pointed out the challenges individual and institutional investors face in competing against a multitude of market participants leveraging sophisticated technology and information.

While the study underscores the efficiency of public financial markets and the erosion of profits from well-documented, simple stock-picking rules, it does not rule out the possibility of successful strategies based on proprietary approaches or alternative data sources outside traditional company financial statements. Such methods, if effective, are likely to be closely guarded within professional investment firms.

Overall, the research indicates that the period when investors could reliably earn above-market returns by applying publicly available quantitative signals appears to have ended, reflecting the evolving complexity and competitiveness of modern securities markets.