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The “leek stock” is also worth investing in

The distribution patterns of returns for various asset classes such as stocks and funds are either left-skewed or right-skewed at the median. Very few assets have a standard normal distribution of returns. In his book, The Black Swan, Taleb discusses in detail why the distribution pattern of asset returns is not normal, while the probability of a small probability event actually occurring is much greater than what a normal distribution implies, in a statistical sense. Taleb focuses on the phenomenon of left-skewed fat tails in the median of return distribution patterns.

In short, a left-skewed pattern means that there is a high probability of losing, but also a chance of very high returns, while a right-skewed pattern means that there is a high probability of winning, but also a chance of experiencing very low returns. We call stocks with left-skewed patterns “leek stocks”. Investing in these stocks is similar to buying a lottery ticket – it is common for traders to lose money, but there is also a chance of success; it is also similar to buying insurance – you buy the insurance and pay the premium, but it does not mean that accidents will happen.

Overall, “leek stocks” are characterized by low valuations, high individual stock-specific volatility and one-day gains, thin prices, low earnings quality and little analyst coverage. These characteristics are actually quite understandable: low earnings quality means that the valuation of “leek stocks” is not very confident; high single-day volatility creates the lottery-like nature of these stocks’ returns; thin prices make it easier for retail investors to buy; and less analyst coverage means that institutional participation is low and “leek The profitability of “leek stocks” is a purely transactional zero-sum game.

However, “leek stocks” are not useless.

Our quantitative analysis found that the likelihood of these stocks hitting it big in the run-up to the performance period increased dramatically, but to achieve such excess returns one had to buy and trade a basket of “leek stocks”.

The stock-specific volatility of “leek stocks” cannot be explained by common market betas. In other words, the risk of “leek stocks” is almost “invisible and intangible”, unlike the usual definition of “risk” in investment science, but more akin to “Uncertainty” – that is, a risk that cannot be expressed in simple statistics. Therefore, the rewards of taking on this uncertainty are similar to the huge lottery winnings, but they are difficult to predict with quantitative models. Or rather, the uncertainty is taken on without necessarily reaping the rewards. From this perspective, buying leek stocks is not an investment, but a gamble.

If “leek stocks” are a gamble, then why have they existed for so long and occupied a place in domestic and international markets? If retail investors are going to join the “non-leek stocks” as the consensus suggests, then it means that retail investors will be involved in the game with the institutions. As we all know, in this field retail investors do not have any advantage of playing on the same stage.

Logically, the only way for retail investors to participate in “non-leek stocks” is to buy funds and surrender their investment decisions to fund managers as trustees. In such a market, the rights of individual investors must be protected in a well thought out and institutionalized manner.

If the market still has a long way to go in terms of investor protection, how can retail investors invest in such an environment?

Before Warren Buffett became the richest man, he discussed the advantage of being a retail investor, which is the ability to invest in companies with low institutional involvement that are not yet well covered by analysts through their own analysis and due diligence – similar to what we define as “leek stocks “. The uncertainty in these companies cannot be predicted by quantitative models, but can be effectively controlled by knowledge of the company’s operating history and current situation, as well as knowledge of management. These are the companies that are fertile ground for excess returns and are the secret to Buffett’s long-term success.

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