There are hundreds of excess return investment strategies floating around, but they are all variations on a dozen or so basic investment strategies that have been used since the beginning of stock trading.
In other words, it was a new investment strategy recommended to a new generation of investors by modifying it to fit various topics and giving it a new name.
This investment strategy has persisted to this day because it appeals to human instincts and weaknesses (greed, fear, pride, etc.).
This book examines how these investment strategies can deceive people into investing failure and explores how to achieve success.

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According to common wisdom, low PER stocks are cheap and therefore good for investment.
This is supported by empirical evidence that low PER stocks have significantly higher returns than high PER stocks.
However, if we look at the relationship between PER and fundamentals, low PER stocks are more risky and have lower expected growth rates.
In Chapter 3, we constructed a low-PER stock portfolio and removed stocks that fell short of the risk and growth rate criteria to examine their relationship.
Of the 115 stocks with current, trailing, and forward PERs of less than 10, more than 60% were removed due to higher-than-average risk or lower-than-average growth rates.
In short, an investment strategy based solely on the PER can be risky.
For long-term investors, a strategy that focuses on investing in low-PER stocks with lower-than-average risk and reasonable expected growth rates is more desirable.

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Many investors believe that a stock is cheap if its price is lower than its book value (net asset value).
They believe that book value is a more reliable measure than stock price and is equivalent to liquidation value.
Empirical evidence also seems to support this, as past returns of low PBR stocks have been much higher than market returns.
But this strategy is risky.
This is because book value is merely an accounting measurement and has nothing to do with the value of the company's assets or their liquidation value.
In particular, accounting choices such as depreciation methods, expense treatment methods such as restructuring costs, and share repurchases can have a significant impact on book value.
From a fundamental perspective, companies with high risk, bleak growth prospects, and low ROE have low PBRs.
These companies are not undervalued.
By implementing a low PBR stock investment strategy with a portfolio of low PBR stocks that are not too risky and have a high ROE, you can reduce the risk of loss while expanding profit opportunities.

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Some people believe that companies with stable profits are safe and therefore good for investment.
However, this claim lacks both theoretical basis and empirical evidence.
Companies that pay significant costs to reduce risks that shareholders can effectively avoid through diversification are harming shareholders.
You shouldn't expect that a company with stable profits will be a good investment.

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One should not expect a correlation between the size of economic value added and stock returns, or between changes in economic value added and stock returns.
Even if economic value added increases to record levels, stock prices may not rise.
This hypothesis is also supported by research by Merrill Lynch's Richard Bernstein, who examined the relationship between economic value added and stock returns.
From February 1987 to February 1997, the portfolio consisting of the top 50 companies in terms of economic value added returned 12.9% per year, while the S&P index returned 13.1% per year during the same period.
During the same period, the portfolio consisting of the top 50 companies in terms of economic value added growth rate in the previous year had an annual return of 12.8%.
In short, investing simply because economic value added increased significantly (or at a record rate) in the previous year will not be successful.
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If past growth rates aren't a reliable indicator of future growth, what's the alternative? One option is analyst growth estimates, but these are only valid for companies analyzed by analysts.
The other is to use past sales growth rates instead of past profit growth rates.
Sales growth rates are generally more consistent and therefore easier to predict than profit growth rates.
This is because the impact on sales through the choice of accounting technique is much smaller than the impact on profits.
(Omitted) The correlation between sales growth rate and profit growth rate is consistently higher than that between sales growth rate and profit growth rate.
This means that past sales growth rates are much more useful than past profit growth rates when estimating future growth rates.

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Contrarian investors believe that investing in recently declining stocks is a promising strategy.
They believe that people overreact to new information, causing stock prices to fall excessively after negative news (such as earnings declines or dividend cuts) and rise excessively after positive news.
Empirical evidence also appears to support this belief.
Several studies have shown that holding stocks that have recently plummeted can yield high returns over the long term.
However, these stocks are usually low-priced, so trading costs are high and the risk is greater than the market.
Success with contrarian investing strategies requires a long-term perspective and the patience to endure volatility.
And you should carefully structure your portfolio to reduce transaction costs and risks.
Most investors experience losses first and then gain profits.
It should be noted that contrarian investment strategies are not safe.

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Does a higher expected return mean a better investment? Not necessarily.
The argument that the higher returns of these stocks are due to the greater risk they take on should be examined.
For investing in small or unlisted companies to be a sound investment strategy, the expected returns must be sufficiently greater than the higher risk involved.
It might be possible.

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The parties who benefit most from a merger or acquisition are the shareholders who already hold shares in the target company at the time of the acquisition announcement.
To reap these benefits, you must purchase shares in advance of the company becoming an acquisition target.
Buying stocks after an acquisition announcement is a risky strategy with limited returns.
By identifying commonalities among companies that have been acquisition targets in the past, we can identify potential acquisition targets in the future.
These companies typically have low insider ownership and poor management, resulting in low business profitability and low stock returns.

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[Eat 'em all! M&A giant]

Pure arbitrage opportunities, if they exist, are found in the futures and options markets, and are almost always very narrow and short-lived.
Only a select few investors with good access to information and strong execution skills can profit from this.

Approximate arbitrage refers to situations where two nearly identical assets trade at different prices, but there are significant constraints that prevent the two prices from converging.
For example, closed-end funds trade at a significant discount to the market value of the shares they own.
If you buy the entire fund and liquidate it, you can make a significant profit.
Unfortunately, due to various restrictions before liquidating the fund, you may have no choice but to hold onto your shares and simply wait for the discount rate to decrease.

Speculative arbitrage occurs when two similar assets trade at a price that deviates from their past normal levels, leading investors to mistakenly believe it's a free lunch.
In reality, this strategy is a risky position, often resulting in (small) profits, but then a single mistake can lead to a huge loss.

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There are two momentum strategies available to investors.
The first is to buy stocks that have price and volume momentum.
In other words, buy stocks that rise more than other stocks during a certain period and have a large increase in trading volume.
These stocks are riskier than others, but you can increase your odds of success by eliminating overvalued stocks that insiders are selling.
The second is to buy stocks that have announced positive earnings surprises and expect the stock price to rise after the earnings announcement.
Again, distinguishing between companies that are likely to consistently grow their profits and those that are not is crucial to increasing your chances of success.

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Why do so many investors believe in the power of market timing? Perhaps it's because it's so easy to find market timing indicators that appear to work based on historical data.
If you have extensive stock data and a powerful enough computer, you can probably find a few dozen indicators (out of hundreds).
In the same way, most market timing newsletters claim that hypothetical portfolios following their techniques have shown outrageous returns.
Probably a lot of professional market timers would go around bragging to everyone when their predictions are right, and then quietly hide when they're wrong.

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