There is no denying that investing to beat the market averages can be involving, intellectually fascinating, competitively stimulating, entertaining and, let's face it, fun.  Like a trip to Las Vegas, Nevada, there are winners and losers, but evidence suggests that even for professionally-managed mutual funds the expected value after costs is slightly negative.  We think it is possible to improve the odds a bit with better strategy, and better conceptual tools. Possible, but not easy, because it means you are going to have to outwit many very bright people.

Of course, you need to be careful not to run up costs -- either through trading costs or taxes, and careful to pay attention to risk management.  These constraints involve not only careful analysis, but the discipline not to let your emotions take over.  Beyond these, as in any competitive situation involving many players, your best chance to develop a skill  with payoff is to specialize, to do something different from what most investors are doing.  Here are three starting points, among many possibilities, for constructive differences.

The PB-ROE Model Applied to Stocks

The deep value investor looks only at down-and-out companies, while the growth-at-a-price crowd rationalizes buying stocks that have done well in the past. Here is a simple quantitative technique, not widely used, for putting a wide-range of companies on the same valuation measuring stick.

 

The PB-ROE Model Applied to the Market

This is a PowerPoint presentation that describes using the PB-ROE model to assess the price of the US stock market, as measured by the S&P500.  You can skip most of the math, but you will need to understand a bit of statistics.  In terms of difficulty, this presentation could easily be in the Professional section.  It is here because it gives the reader a sporting chance to avoid both the peaks of speculative stock market bubbles and the depths of their aftermath.

 

Long-term, Nonlinear Investing

This approach is good for the intellectually curious person who wants to understand long-term changes in the economy and society.  A short essay.