Popularity Investing Framework
Find return premiums by identifying what investors systematically avoid
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 97%
Popularity Investing treats price as the product not only of cash flows and risk but also of investor preferences. Begin with comparable assets, then examine why one attracts more demand than another. Classical dimensions include risk, liquidity, and tax treatment; behavioral dimensions include brand recognition, reputation, media attention, and memories of adverse events. Greater popularity raises the current price and therefore tends to lower the expected future return, while neglected or disliked characteristics can produce a discount and higher expected return. Portfolio construction can bundle relatively unpopular securities on the long side and popular securities on the short or underweight side. The mechanism only works after implementation costs and when the source of unpopularity is persistent rather than a temporary data artifact or an unrecognized fundamental collapse.
Origin
Extracted from Masters in Business. Roger Ibbotson described the approach used at Zebra Capital Management and developed in the monograph Popularity: A Bridge between Classical and Behavioral Finance.
Core principles
- 01Popularity raises an asset's price and reduces its expected return.
- 02Unpopular characteristics can create durable return premiums.
- 03Risk, illiquidity, and unfavorable taxation are classical sources of unpopularity.
- 04Brands, reputation, attention, and remembered tail events create behavioral popularity effects.
- 05A great company can be a poor investment when its popularity is already priced in.
- 06A factor needs an enduring reason to remain unpopular if its premium is to persist.
How to run it
- 1
Define comparable assets
Choose securities with sufficiently similar economic exposures or evaluate each asset relative to an appropriate peer group. Comparability helps distinguish popularity-driven price differences from differences in expected cash flows.
Pro tip Use broad groups rather than forcing exact one-to-one pairs when several popularity dimensions are involved.
Watch out Superficially similar assets may carry materially different business, default, or duration risks.
- 2
Measure classical popularity
Assess characteristics such as risk, liquidity, and tax treatment. Determine which characteristics investors willingly pay more to obtain or avoid.
Pro tip Observable yield spreads between economically similar securities can reveal the price of liquidity or tax treatment.
Watch out Do not treat every low valuation as a popularity discount; fundamental risk may justify it.
- 3
Measure behavioral popularity
Evaluate brand strength, reputation, media attention, investor familiarity, and remembered tail events. These preferences can influence demand even when they do not reliably predict future cash flows or risks.
Pro tip Look for overlooked companies rather than limiting the search to scandal-damaged names.
Watch out A damaged reputation can accompany genuine operational deterioration.
- 4
Rank popularity relatively
Rank assets within their comparison groups instead of applying an absolute popularity threshold. Identify the most popular and least popular bundles across multiple dimensions.
Pro tip Combine several independent dimensions so a single noisy signal does not dominate.
Watch out Popularity changes as narratives, performance, and capital flows change.
- 5
Construct the exposure
Favor or buy the less-popular bundle and underweight or short the more-popular bundle. Diversify across many securities rather than relying on a few exact pairs.
Pro tip Size positions around liquidity, volatility, and the strength of the popularity differential.
Watch out Shorting popular assets can remain painful while enthusiasm continues.
- 6
Test implementation economics
Estimate turnover, transaction costs, taxes, financing costs, and capacity before relying on a backtested premium. Reject ideas whose theoretical advantage cannot survive real execution.
Pro tip Stress-test costs at larger asset levels because a strategy can move its own prices.
Watch out Capital flowing into a discovered premium can make the strategy popular and price away its return.
In the wild
Ibbotson compares highly liquid on-the-run Treasury securities with slightly less liquid off-the-run issues of similar maturity. The more actively traded security can command a premium, producing a yield spread even though the underlying credit exposure is effectively the same.
→ The less-liquid security offers a higher expected return as compensation for an unpopular characteristic.
Highly recognized companies attract investors because their products and stories are familiar. Ibbotson argues that lesser-known companies can be more attractively priced, provided they are merely overlooked rather than fundamentally broken.
→ The investor distinguishes a great stock purchased cheaply from a great company purchased at an excessive popularity premium.
A plausible application ranks a broad equity universe using liquidity, brand attention, valuation, and reputation. The investor buys a diversified basket from the less-popular ranks and underweights or shorts a risk-controlled basket from the most-popular ranks, then reduces positions when flows erase the valuation gap.
→ The portfolio seeks a diversified popularity premium while controlling implementation and company-specific risks.
Common mistakes
Confusing a great company with a great stock
An excellent business may already carry an excessive valuation because investors admire it. Investment returns depend on the price paid as well as company quality.
Buying every distressed security
Unpopularity does not automatically make an asset attractive. Investors must separate temporary neglect or dislike from permanent impairment and justified risk discounts.
Ignoring strategy crowding and costs
A premium discovered in historical data may attract enough capital to price itself away. High turnover, market impact, taxes, and financing can eliminate what remains.
Is it for you?
Best for
It is best for investors comparing securities, factors, or portfolios through both classical and behavioral finance lenses.
Not ideal for
It is not ideal for short-term prediction, concentrated bets without comparable assets, or strategies whose trading costs consume the expected premium.
From the transcript
“anything that is popular tends to have a higher price. Anything that is unpopular tends to have a lower price.”
“there's a difference between buying a great company and buying a great stock.”
“in order for a a factor to really pay off and forward from over the long term, in anyway, it has to be unpopular in…”
From the episode
Roger Ibbotson Discusses the History of Finance (Podcast)
Roger Ibbotson