Source: Red and Green As centralized investors, our goal is to have a greater understanding of our companies than any Wall Street investor. If we are willing to work hard and learn as much as possible about our companies, we are likely to know more than general investors, which is all we need to gain a competitive advantage. On the product structure side, the operating income of products worth 10-30 billion yuan is 401/1288/60 million yuan, respectively, in 2023, the overall sales volume of the company reached 18,000 kiloliters, a year-on-year increase of 28.10%, showing significant growth.

James O'Shaughnessy's first edition of 'Classic Wall Street Stock Market Strategies' was published in 1995. At that time, it was less than 300 pages. After twenty years of revisions, it has now become the fourth edition, with the number of pages increasing to over 700, and the Chinese title has also been changed to 'Investment Strategy Practical Analysis: 20-Year Deduction of Classic Wall Street Stock Market Strategies.'

1. The Only Way to Beat the Market

When O'Shaughnessy was writing the first edition, the Nasdaq index grew nearly sevenfold in the 1990s. However, in the first decade of the 21st century, it entered the most severe bear market since the Great Depression. This destroyed the confidence of many investors in the stock market and left them in an unprecedented situation of no return since the 1930s. At that time, the criticism of stocks continued to grow as their value declined.

On February 19, 2009, Barron's published an article titled 'Modern Portfolio Theory is Seriously Outdated: Death of the Buy and Hold Strategy.' Ken Stern believed that the buy and hold strategy is a losing game, and the market may be filled with too much uncertainty in the future. Relying solely on carefully designed investment portfolios and the long-term returns generated cannot offset the impact of taxes and inflation. Institutional Investor magazine published an article titled 'Rest in Peace, the Stock Investment Culture from 1982 to 2008 is Fading Away' in the January 2010 issue. It pointed out, after suffering two brutal crashes in the stock market, investors are questioning the traditional idea that stocks outperform bonds. They are withdrawing funds from stocks in large numbers, and Wall Street has changed dramatically.

Investors' outlook on the long-term future of stocks is sometimes so pessimistic. They seem naturally inept at investing, always bidding on assets that have recently performed exceptionally well and discounting those that have performed well compared to three to five years ago. O'Shaughnessy's purpose in writing this book is to try to prevent investors from doing this. Only time can prove which investment strategy performs best in the long term.

The time span of Osarense's empirical research, conducted by the Instituto Superior de Estatística, is 46 years, starting from 1963 and ending in 2009. Although the sample size may not be large, Osarense believes that the data applicable from 1963 to 2009 is also applicable to the data from 1926 to 2009. Osarense's single-factor model includes variables such as repurchase yield, return on net assets, EBITDA to company value ratio, cash flow to company value ratio, sales to company value ratio, accrued profit to price ratio, cash flow to finance ratio, annual sales growth rate, as well as various financial variables and relative valuation indicators.

Osarense sorts the deciles (10%) of stock returns in each factor model from top to bottom, showing the performance results of each single-factor model. Osarense focuses on the extreme values of each factor and presents the returns of the top and bottom 50 stocks in terms of each factor. All single factors, such as return on net assets, P/E ratio, or P/B ratio, can constitute an investment strategy.

After reviewing the performance of various investment strategies, we will find that investors who adhere to the best long-term investment strategies have significantly better returns than those who rely solely on luck. Osarense believes that stocks will continue to outperform other investments in the next 10 to 20 years. This is indeed the case, as the US stock market has been in a bull market for 15 years since 2009, and the three major indexes are still hitting new highs.

From a historical perspective, we can always see mean reversion - after experiencing 10 to 20 years of good times, stock returns usually remain below the average level for the next 10 to 20 years; and after experiencing 10 to 20 years of slump, stock returns tend to be higher than the average level for the next 10 to 20 years. This conforms to the statistical patterns in economics. After 10 to 20 years of good times, stocks usually have high P/E ratios and low P/B ratios; after 10 to 20 years of poor performance, stock returns reverse and are usually characterized by low P/E ratios and high dividend yields.

Many investment strategies are mediocre, and most strategies, especially those that attract the majority of investors in the short term, cannot beat the simple investment strategy of tracking the S&P 500 index. The stock market does not move for no reason. In this market, certain specific investment strategies always generate high returns, while certain investment strategies are punished. Long-term return data shows that the long-term returns of the stock market are not random walks. If investors adhere to time-tested investment strategies, their performance will be much better than the market. We believe that the better the strategy, the more sustainable it is.

In the long run, the only way to beat the market is to adhere to wise investment strategies. Within any 10-year period, 70% of the investment funds tracked by Morningstar cannot beat the S&P 500 index, because these fund managers fail to adhere to investment discipline in all circumstances. The lack of discipline seriously hampers the long-term performance of these funds.

Second, successful investment lies in defeating oneself.

There are two main types of stock investment strategies: active investment and passive investment. Active investors try to maximize returns at different levels of risk by purchasing stocks that outperform others. Based on different investment styles, active investment can be roughly divided into growth investment and value investment. The choice of which stocks to invest in largely depends on their investment philosophy.

Growth investors favor companies whose sales and profit growth rates exceed the average level, and they hope these companies can achieve higher growth in the future. This type of investor believes in the potential of the company and thinks that the stock price will rise with the increase in company profits. Value investors are dedicated to finding stocks that are currently trading significantly below their liquidation value. They use indicators such as P/E ratio or P/S ratio to determine when the stock value is below its intrinsic value, and then purchase at a discount. They believe in the balance sheet and think that the stock price will eventually rise to its intrinsic value. Active funds usually mix these two investment strategies, but the most successful funds have very clear investment strategies.

Active management is theoretically correct, but a review of historical records shows that their actual performance is not good. In the short term or long term, most active funds have not outperformed the S&P 500 index. The result is the rise of passive index funds. Passive investors buy an index that they believe can broadly represent the market, and then just leave it. Their goal is not to beat the market, but to stay consistent with the market. In exchange for performance not inferior to the market, they are willing to give up the opportunity to beat the market.

The traditional way of managing funds cannot achieve returns above the market level, and the academic community is not surprised by this. For a long time, most scholars have believed that the market is efficient, and current security prices reflect all available information. They believe that stock prices follow the 'random walk hypothesis'. According to their theory, because stock prices are random and unpredictable, analyzing stocks is not as good as having a monkey throw darts at the stock section of a newspaper.

However, stock prices are far from a random walk, and their fluctuations follow a clear pattern. Over a considerable period, in many market cycles, stocks with certain characteristics (such as low P/E ratio, low P/CF ratio, low P/S ratio) have clearly and consistently gained returns, while stocks with other characteristics (such as high P/E ratio, high P/CF ratio, high P/S ratio) have clearly and consistently suffered losses.

Since historical data checks have shown such high predictability, why is it that up to 70% of traditional funds are always unable to beat the S&P 500 index in the long term? Finding profitable investment opportunities does not mean making money is easy. It requires consistency, patience, and perseverance in a particular investment strategy, even if this strategy performs poorly compared to other investment methods.

All investment strategies have their performance cycles, and their performance fluctuates around a certain relative benchmark. The key to achieving long-term superior performance is to find an investment strategy with the highest fundamental return or average success rate, and then stick to that investment strategy, even when the performance of the strategy is inferior to other investment methods or performance benchmarks. Very few people can do this, successful investors should not succumb to their nature, but should overcome themselves.

Most investors' reactions to short-term market declines are highly emotional. They invest only for a few months, and once the performance is poor, they would say that these investment strategies did perform well before, but may not always be effective. In fact, historical data shows that in certain periods, some factors reverse, and long-term factors that once had outstanding performance are defeated by factors that once caused huge losses. When investors actually operate, they consider long-term analysis of the factors affecting returns as a boring thing, and become emotional, fearful, and worried about the stock turning over in the long run.

The only way to successful investment

Most traditional fund managers' historical performance cannot be used to predict future returns because their investment behavior is discontinuous. We cannot predict based on discontinuous investment behavior, because when your behavior is discontinuous, others cannot predict your behavior. Even if a fund manager's investment behavior is very consistent, if that manager leaves the fund company, the fund's historical record will lose all predictive power for the future. Therefore, what traditional scholars have been studying all along is wrong. Historical performance records are only valid when the investment strategy of a fund is understood and the fund is still following that strategy.

Investing through the S&P 500 index can be successful because this investment method bypasses the flawed investment process and automatically operates a simple investment strategy: buying the large-cap stocks that make up the S&P 500 index. The reason why the great S&P 500 index can continue to outperform 70% of traditional funds in the long term is that it insists on focusing on large-cap stocks. Of course, the S&P 500 index does not represent the market, and its return is just a simple 'investment in large-cap stocks' strategy. The success of this index is due to the fact that the S&P 500 index never deviates from its established investment strategy.

However, investing in large-cap stocks of the S&P 500 index is just one of the many ways to implement this passive investment strategy. In fact, the long-term performance of the S&P 500 index is quite mediocre and can only rank in the bottom third of all funds tested by O'Shaughnessy. The long-term performance of countless investment strategies far exceeds that of the S&P 500 index. One such example is an investment strategy known as 'Dogs of the Dow', which only buys the top 10 dividend-yielding stocks in the Dow Jones Industrial Average index each year. This strategy has been very successful in the long term, consistently outperforming the S&P 500 index from 1928 to 2009.

The only common feature found in the most outstanding fund managers is continuity, and this applies not only to O'Shaughnessy. In the 1970s, a survey conducted by the American Telegraph and Telephone Company of its retirement fund managers found that the minimum requirement for successful investment is: their structured investment decision-making process must be easily defined, their investment philosophy must be clear and can be consistently adhered to. John Neff and Peter Lynch became legendary figures because they could steadfastly adhere to their investment strategies and achieve great success.

During the stock market crash from October 2007 to February 2009, when stocks plunged at an unprecedented speed, many investors abandoned the investment strategies they had been using. O'Shaughnessy believes that this will ultimately greatly harm their long-term investment performance. In the face of such a market, it is actually impossible to remain indifferent. However, the only way to ensure excellent long-term investment performance is to adhere to those investment strategies that have stood the test of time. However, there are very few funds that implement this strategy.

O'Shaughnessy found that there is indeed a fund that truly adheres to this investment strategy, and that is the Antai Securities Trust and Investment Company. This fund was established in 1935, and it only holds stocks of 30 companies that the fund founder considers industry leaders, such as ExxonMobil, Procter & Gamble, American Telephone and Telegraph Company, General Electric, and Dow Inc., etc. Since its establishment in 1935, the fund's performance has far exceeded the average standards of the S&P 500 index and large-cap stock funds.

David Foster found in his work 'The Limitations of Scientific Reasoning' that human judgment always lags behind simple mathematical models. Like traditional investment fund managers, most professionals cannot beat the passive, time-tested formulas. The reason models can outperform humans is because they make consistent judgments according to the same criteria time and time again. In almost every situation, the only reason models perform better is that they are consistently adhered to and applied, without wavering.

Over a period of 5-10 years, the return of any investment strategy may look impressive. There are countless investment strategies that may perform extremely well at some stage, but have a very poor long-term performance. In any given year, there are always some strange investment strategies that succeed. In reality, the longer the time span chosen for researching a strategy, the greater the likelihood it will continue to be effective in the future. From a statistical perspective, the credibility of results from large sample sizes is always more reliable than those from small sample sizes. The longer the research time span, the greater the reference value of the results.

Most of the strategies that perform the best have greater market risk than as a whole, but there is a small fraction that performs much better than the market, with only a slightly higher risk, and in some cases even lower risk. Most of the strategies that perform the worst actually have greater risk than the best performing strategies. The results show that the market does not always reward high-risk investment portfolios with high returns. The strategies with the highest risk also have the highest downside risk and largest drawdowns, while the strategies with the lowest downside risk belong to the strategies that have performed well in the past. Outstanding companies and industries will also experience changes in the coming years, but the persistence of what works and what doesn't work will continue to exist. The lesson from long-term data is clear: find profitable strategies in the long run and stick with them. For us, strategies are not limited to those of Jack Bogle's. Including concentrated investments, circle of competence, mental grid, and long-termism, all can be considered as strategies.

Every investment strategy will have its ups and downs, and these fluctuations should be expected and not feared. As long as we believe that a stock meets our investment criteria, we should not refrain from investing just because it may underperform. Many investment strategies have had periods of underperformance, stages where their performance has not been as good as the S&P 500 index, but they have also had periods where their performance has exceeded the index by a large margin. Understanding this principle, taking a long-term perspective, and allowing the investment strategy to work is key. If we do this, the chances of success are very high; if we don't, no amount of knowledge will help, and we will find ourselves among the 70% of underperforming investors.

If an investor can understand the potential outcome of a strategy, they will have a significant advantage over competitors who do not understand this. If the maximum expected loss for a strategy is 30%, and the current loss is 15%, an investor who understands the situation will not panic, but rather feel relieved that the situation has not become worse. If an investor understands the potential range of fluctuations for a particular investment strategy, they will be able to constrain their emotions and expectations, serving as a pressure release valve for emotions. Taking a historical perspective, an investor's rationality will surpass their emotions. This is also the only way to achieve successful investments.

Editor / jayden