The 'Grandmother' Of All Market Anomalies?

Jun. 21, 2022 12:02 PM ETALK, BA, CCL, CZR, DAL, JBLU, LYFT, MGM, MRNA, NCLH, UAL, XBI, AAL, AMC, ARKK, GBTC, GME2 Comments3 Likes
Victor Haghani profile picture
Victor Haghani


  • The chart below provides a window on a significant market anomaly that has received less attention than it deserves.
  • American Airlines is just one of a number of stocks and other assets that have exhibited this behavior.
  • If an investor had been able to go long the blue line with a short in the red line, that investor would have experienced a 100% per annum positive return.
  • This phenomenon is not limited to AAL stock and has broader implications for active individual investors, questions of overall market efficiency, and the current debate on market reforms.


sweetym/E+ via Getty Images

The bedrock of financial economics is that there should be a tradeoff between risk and reward: An investment with low risk should have a low expected return, while one that could make you rich also should be one which could lose you a lot of money. A lot of research in finance is focused on finding deviations to this risk-reward tradeoff, which are called "market anomalies" in deference to the idea that they are exceptions to this fundamental law of finance. Discovery of an anomaly is usually followed by frenzied debate and research that tries to explain it away as: 1) a statistical fluke, 2) compensation for some hitherto overlooked risk, or 3) some friction in the market which when fixed will make the anomaly go away.

The chart below illustrates one such anomaly, which is large and relatively lightly researched, and the debate about it is still raging. What we see in the chart is the performance of three different ways an investor could have taken exposure to American Airlines (AAL) stock (ignoring transactions costs and frictions, and data from Yahoo Finance). The white line shows the value of $1 invested at the start of the period and held to the end.

Chart of Three Ways of Trading American Airlines Stock

Three ways to invest in American Airlines (AAL) (Yahoo Finance)

Can you guess what the other two lines are?

One dollar invested in the blue line combined with a short position in the red line would have turned $1 into $7,020, a roughly 100% annual return. It has a high Sharpe Ratio too (again, without accounting for transaction costs or other trade frictions). Many other popular stocks displayed similar characteristics over the past several years, such as Alaska Air (ALK), AMC Entertainment (AMC), Boeing (BA), Carnival (CCL), Caesars (CZR), Delta (DAL), GameStop (GME), JetBlue (JBLU), Lyft (LYFT), MGM Resorts (MGM), Moderna (MRNA), Norwegian Cruise (NCLH), United Airlines (UAL), ARK Innovation ETF (ARKK), SPDR Biotech ETF (XBI), and Grayscale Bitcoin Trust (OTC:GBTC).

What do these stocks have in common?

If you are intrigued, stay tuned for our forthcoming research note which we hope to publish this coming Thursday, in which we try to explain this phenomenon and discuss its potential significance for investors and regulators.

Elm Wealth does not offer the strategy discussed above. Elm Wealth charges 0.12% per annum to manage highly diversified portfolios, primarily of low-cost ETFs, for high net worth families and individuals. This article does not represent an offer to invest. Neither the discussion above, nor anything else that Elm Wealth presents research on, should be interpreted to suggest that past returns are indicative of future performance.

This article was written by

Victor Haghani profile picture
Victor Haghani has spent 30 years actively involved in markets and financial innovation. He started his career in 1984 at Salomon Brothers, in research and then in the Bond Arbitrage group run by John Meriwether. Victor was a founding partner of LTCM. After a 10 year sabbatical from the investing business, Victor founded Elm Wealth ( in 2011 to help investors manage their savings in an efficient and disciplined manner, and to capture the long-term returns they ought to earn.Victor has published research on a range of financial topics, but his main interest has been on trade sizing and Portfolio Choice and Lifetime Consumption. His most popular lecture is a TEDx talk titled "Where are all the billionaires, and why should we care?"

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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