Superperformance Stocks: An Investment Strategy for the Individual Investor Based on the 4-Year Political Cycle

By Richard S. Love

Quick Summary

A systematic study of "superperformance stocks" -- those that dramatically outperform the market -- and the conditions under which they emerge, with a primary focus on the four-year U.S. presidential election cycle as a timing tool. Love identifies the characteristics of stocks that achieve extraordinary price gains and shows how political and monetary policy cycles create predictable windows of opportunity for buying and selling.

Executive Summary

Richard Love's "Superperformance Stocks" presents a methodical approach to identifying stocks capable of extraordinary price advances and timing their purchase using the four-year U.S. presidential election cycle. Through analysis of multiple market cycles from the 1940s through the mid-1970s, Love demonstrates that stock prices follow a remarkably consistent pattern tied to presidential elections: markets tend to bottom in the first two years of a presidential term and rally strongly in the pre-election and election years. He combines this macro timing framework with fundamental and technical criteria for selecting individual stocks, including new earning power, price volatility, favorable price/earnings ratios, and institutional sponsorship.

Core Thesis

Stock markets are heavily influenced by the four-year political cycle because government fiscal and monetary policies are driven by electoral considerations. By identifying this cyclical pattern and combining it with careful stock selection criteria, individual investors can achieve returns far exceeding the broad market averages. The key is buying cyclically depressed, volatile stocks with emerging earning power during the favorable phases of the political cycle.

Key Concepts and Frameworks

1. The Four-Year Political Cycle -- Presidential administrations tend to implement restrictive policies early and stimulative policies before elections, creating predictable boom-bust patterns in stock prices.
2. Superperformance Stock Characteristics -- These stocks typically feature small-to-mid-cap size, high price volatility, new or accelerating earnings, emerging industry trends, and expanding price/earnings ratios.
3. Selling Climax Buying -- The best time to buy is during the selling climax that typically occurs in the first half of the presidential cycle.
4. Price Volatility as an Edge -- More volatile stocks offer greater potential returns when bought at cycle lows.
5. Institutional Sponsorship -- Early accumulation by institutions creates momentum that drives superperformance.
6. Short Selling Timing -- The ideal time to sell short is when political and monetary conditions shift to restriction.

Practical Applications for Traders

1. Use the presidential election cycle to time broad market exposure -- increase equity positions in the second half of the presidential cycle.
2. Focus on volatile, smaller-cap stocks with accelerating earnings during the favorable buying window.
3. Look for expanding P/E ratios as a confirming signal of institutional demand.
4. Be willing to sell and go to cash or short during the restrictive phase of the cycle.
5. Combine political cycle timing with fundamental analysis of individual company earnings power.

Critical Assessment

Strengths

• Provides a systematic, repeatable framework based on observable historical patterns
• Extensive data covering multiple cycles from the 1940s through the 1970s
• Practical stock selection criteria that anticipate later methodologies like CAN SLIM
• Clear writing with numerous chart examples

Limitations

• Data ends in the mid-1970s; the four-year cycle has been less reliable in subsequent decades
• Does not account for the increasingly global nature of markets and non-U.S. influences
• The political cycle thesis oversimplifies the complex drivers of market movements
• Limited treatment of risk management beyond cycle timing

Conclusion

Love's work is a pioneering study of political cycle investing that anticipated many later developments in market timing and growth stock selection. While the strict four-year cycle has become less reliable in the post-1970s era of globalization and central bank intervention, the underlying insight -- that government policy cycles create predictable patterns in asset prices -- remains relevant. The stock selection criteria are solid and have been validated by subsequent research on momentum and earnings acceleration.