[[Start here]] → [[What works in stocks?|what works]] → drivers --- ![[drivers.png]] What drives stock returns? The answer to this is well understood, even an open secret. While the biggest factor driving all stocks is the overall market direction, *individual stock returns are driven by a range of measurable characteristics.* The most important of these I like to refer to as the "big five factors": 1. **Quality**: [[good stocks beat junk stocks]] 2. **Value**: [[cheap stocks beat expensive stocks]] 3. **Momentum**: [[strong stocks beat weak stocks]] 4. **Size**: small stocks beat big stocks 5. **Low Volatility**: [[low risk stocks beat high risk stocks]] Essentially, if you rank the market by one, several, or all of these characteristics, the highest ranked stocks will tend to outperform the lowest ranked. They don't work all the time, or at the same time, but on average, over the longer term, these are the factors that drive outperformance in stocks. These five factors are the foundation blocks of stock selection. To be really straightforward about it: *if you buy groups of good, cheap, strong, small, safe stocks you will tend to beat the market.* When looking for long-term multibaggers all the above factors are important, but three forces are particularly important which can be summarised by the [[understand multibaggers with the 2x2x2 equation|multibagger equation]]. ## What about qualitative factors? Yes, management, competitive advantage, industry dynamics, demographics and more are significant drivers of stock returns. There's plenty of anecdotal evidence that [[promising stocks often have "something new"]] or [[promising stocks have easy to understand stories|easy to understand stories]]. Such qualities are easy to understand, even if they are hard to quantify. But the more you diversify your portfolio, the more these unique company-specific factors cancel each other out. What's left is often the overall return to the "big five" factors listed above. --- Next topic: [[diversify for resilience]].