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I’m studying up on the book What Works on Wall Street for equity investments strategies.

While the book is very insightful, essentially it seems to be a system of filtering (say by market cap or price to book value for example) and then ranking all stocks in your universe by some fundamental indicator (return on equity, or momentum say). The author then invests long in the stocks in the top decile from the ranking, rebalancing yearly and produces a table of backtest results with Sharpe ratio, average annual returns beta etc.

The various strategies all seem to work in the very long term (the author backtests from 1964 or even 1927 in a lot of cases) and beat the market i.e achieve higher sharpe ratio or higher absolute returns than the S&P500 in the same period.

My background is in statistics and computer science, so my approach when analysing investments is usually to analyse the time series of individual stock returns and try to build a predictive modelling framework (which is near impossible, needless to say). So when I came across this book which implements such simple rules yet achieves remarkable results, I found it too good to be true - which is usually the case in the investing world.

Are the results in this book feasible for a retail investor to achieve in the long term?

Of course, investing in micro caps or holding only 20-50 stocks in your portfolio (both strategies the author implements) may not be possible for large asset managers due to lack of diversification, liquidity or other constraints, but that should not be an issue for the small amounts of capital a retail investor would invest.

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  • One thing that works against retail investor and not trivial is trading cost.
    – xiaomy
    Aug 23, 2021 at 4:36

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My background is in statistics

Then the following piece of data should be useful

Across all domestic actively managed equity funds, 88.4% underperformed their respective benchmark over the last 15 years, according to an analysis of the S&P SPIVA report. source

Many of these fund managers are paid 100s of thousands (if not millions) of dollars per year and they have enormous research and modelling resources at their disposal. It's a pretty safe bet that they are familiar with the vast majority of investment strategies. But still, the results are abysmal: 90% are not even hitting their benchmark (which is often just a simple index) and chances are most of the ones that do exceed it are just lucky.

I let you draw your own conclusions from here.

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  • I appreciate what you’re saying and know it to be true. But my question is more around the validity of the results in the book and, if true, can they be replicated by retail investors? Of course there are assumptions in the authors backtest (fees, whether to drop a stock if it becomes bankrupt etc), but the general trend in results and the potential to beat the market is the impressive part.
    – PyRsquared
    Aug 22, 2021 at 19:28
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    @PyRsquared this answer is a "reverse appeal to authority", and should be heeded. If 90% of experts who's sole job is to create models to beat the market can't beat the market, then it's seriously unlikely that the schemes in this book will either.
    – RonJohn
    Aug 22, 2021 at 23:02
  • Always look past the headline number. That SPIVA report shows stellar performance for index/passive during 2012-2019 (minus 2013), a likely major contributor to this 88.4% number and the whole passive>active argument. But will this trend continue? Indeed, draw your own conclusion.
    – xiaomy
    Aug 23, 2021 at 4:35
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    @PyRsquared: here is a different way to think about it: If the strategy actually works, why isn't the author independently wealthy and sipping Martini's on the beach instead of trying to sell books which will actually dilute their own strategy?
    – Hilmar
    Aug 23, 2021 at 11:05
  • That’s true, and I always ask myself the same question when I see claims like this. But the author does run an asset management firm where he implements these strategies. Have you read the book? It’s not completely implausible that in the very long term you could beat the market. Mostly we hear of hedge funds with stellar market beating returns within a 5 year period, but who then go on to loose massive amounts over the next few years (mean reversion) - 5 years is too short to measure performance over.
    – PyRsquared
    Aug 23, 2021 at 11:23

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