What is Contrarian Investing?

The reverse investment strategy is to sort the stock returns based on the past period of time, buy the stocks that performed poorly in the past and sell the stocks that performed better in the past, and the zero portfolio based on this will get a higher value in the future. Income investment strategy.

Reverse investment

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The reverse investment strategy is to sort the stock returns based on the past period of time, buy the stocks that performed poorly in the past and sell the stocks that performed better in the past, and the zero portfolio based on this will get a higher value in the future.

The traditional efficient market hypothesis holds that stock returns are unpredictable. However, in the past two decades of empirical research, we have continuously found evidence that stock returns have some predictability. These anomalies make traditional asset pricing models and market efficiency theories face great challenges. For example, scale effect, price-benefit ratio effect and book-to-market ratio effect. Under this background, behavioral finance theory has emerged and developed. At the same time, many different behavioral financial investment strategies have also been produced. The reverse investment strategy is one of them. The reverse investment strategy is to sort the stock returns based on the past period of time. Buyers who have performed poorly in the past and sold stocks that performed better in the past will have a higher zero investment portfolio. Income investment strategy

DeBondtandThaler (1985) believes that the market will overreact. That is, the stock price of a good performing stock will be overvalued, and the stock price of a poor performing stock will be overvalued, so after a period of time, the stock price of a good performing stock will be revised downward, and the stock price of a poor performing stock will be revised upward. ; Therefore reverse investment strategies can get excess returns.
Chang, Meleavey and Rhee (1995) analyzed the Japanese stock market data from 1975 to 1991 and found that there are profit opportunities in the short-term of reverse investment.
Conradand Kaul (1998) used eight different formation periods to cross-examine the profitability of reverse investment strategies and momentum investment strategies in different holding periods. Find out that reverse investment can be profitable in the very short term (January or 1 week) and very long term (3 to 5 years or longer). Blume, Easley and O'Hara (1994) used transaction volume as the basis for technical analysis and found that

(1) Reverse investment strategy after joining MKT For the MKT of the market state factor, the cumulative return of the market during the formation period minus the sign of the cumulative risk-free interest rate during the formation period is used as the criterion for whether to implement the reverse investment strategy. When MKT is positive as the operating standard, the profit of the reverse investment strategy generally increases, and when MKT is negative as the operating standard, the profit of the reverse investment strategy generally decreases. Among them, the increase in profits is most obvious in the two-year September and two-year and one-year combinations.
(2) The reverse investment strategy after joining the Range For the Range of the market state factor, the sign of the direction of change in the maximum difference in the cumulative returns of cross-sectional stocks between months is used as the standard for the reverse investment strategy. When the Range is positive, it indicates that The largest gap in cross-section stocks' cumulative returns widens. vice versa. The results show that the effect of the Range factor on the profitability of the reverse investment strategy is not very obvious. When the Range is positive, the profit of the reverse investment strategy is generally increased in the portfolio with a formation period of 6 months to 1 year, and the profit of the reverse investment strategy is generally reduced in the portfolio with a formation period of more than 2 years, and vice versa The same is true.
(3) After the PE is added, the reverse investment strategy is bred as a whole. (The loser with a low P / E ratio and the winner with a high P / E ratio) have the best strategy, and the strategy of (the loser with a high P / E ratio and a winner with a low P / E ratio) is significantly worse For other strategies. In addition, (the loser with a high price-earnings ratio and the winner with a high price-earnings ratio) rank second and have significant significance, indicating that the winner with a high price-earnings ratio has a very obvious reversal tendency. Winners with high P / E ratios can ensure the profitability of the reverse investment and its significance.
(4) After joining SMB, the strategy of reverse investment (small company loser and large company winner) and (small company loser and small company winner) strategy are significantly better than other strategies, and ( Large-scale losers and small-scale winners are obviously the worst. On the whole, the strategy of (small company losers and large company winners) has the best profit. Therefore, if you include a small-scale loser in your investment strategy, you can ensure the profit of the reverse investment and its significance.
(5) The strategy of reverse investment after adding HML (tp, t-1) (the loser with a low P / B ratio and the winner with a high P / B ratio) and the strategy with (the loser with a high P / B ratio and a high P / B ratio winner ) 'S strategy is superior to other strategies. Among them, the strategy with (the loser with a low P / B ratio and the winner with a high P / B ratio) is the most profitable, and the strategy with the (higher P / B ratio is the winner with a low P / B ratio) The worst profit. Winners with high price-to-book ratios are more likely to reverse.
Significance of Reverse Investment Strategy Reverse investment strategy is the most mature investment strategy developed by behavioral finance theory to date. It is mainly the result of people's overreaction to information. It is based on the anchoring and overconfidence characteristics of investor psychology. This strategy was originally proposed based on an empirical study of debondt and Thaler's overreaction to the stock market. A series of subsequent studies have also supported the overreaction of the stock market and the long-term view of stock price reversals. In this regard, behavioral financial theory believes that this is because investors often pay too much attention to the results of the recent performance of listed companies in their actual investment decisions. Through simple extrapolation, they make future decisions based on the company's recent performance, leading to the company's The recent performance has continued to over-react, resulting in an over-underestimation of the stock price of underperforming companies and an over-estimation of the stock price of top-performing companies. This provides investors with the opportunity to take advantage of reverse investment strategies.
The use of reverse investment strategies to invest is essentially to make investors profit by making corrections to the noise trader's response bias caused by excessive self-confidence. This correction is a natural process of the operation of the securities market. Investors should pay close attention to the price movements of various stocks in the securities market, compare their prices with their basic values, look for stocks whose prices deviate far from their values, build investment portfolios, and obtain returns when prices return to value. In actual securities trading, investors can choose stocks with low price-earnings ratios, stocks with low price-to-book ratios, stocks with historically low returns, and less-interested stocks. These stocks have not been favored by investors for a long time, and the price has a negative bubble. The phenomenon is serious, and its future trend may be the return of value. Especially when the stock market goes bearish, the market often pays insufficient attention to small and medium-cap growth stocks with large potential. Investors should strive to dig up such growth stocks and intervene in advance, and they can sell for profit when the market returns to good value.