--- title: "How to achieve excess returns in the investment market" type: "Topics" locale: "en" url: "https://longbridge.com/en/topics/43144352.md" description: "In the investment market, there are countless ways to make money. Some adhere to value investing, seeking companies whose price is below their intrinsic value; others specialize in arbitrage, profiting from price differences in certain events; some like to dig into small-cap stocks, trying to find dark horses that the market has not yet discovered; while others do not research individual stocks and simply buy index funds for the long term. People have made huge fortunes with all these methods, but many have also lost everything. Because the true source of excess returns is never just a single investment label. A confused person using the correct investment name will still lose money. Some claim to be value investors on the surface..." datetime: "2026-08-03T01:11:06.000Z" locales: - [en](https://longbridge.com/en/topics/43144352.md) - [zh-CN](https://longbridge.com/zh-CN/topics/43144352.md) - [zh-HK](https://longbridge.com/zh-HK/topics/43144352.md) author: "[爱妻的交易员](https://longbridge.com/en/profiles/17289850.md)" --- # How to achieve excess returns in the investment market In the investment market, there are countless ways to make money. Some adhere to value investing, seeking companies priced below their intrinsic value; others specialize in arbitrage, profiting from price discrepancies in certain events; some like to dig up small-cap stocks, trying to find dark horses yet to be discovered by the market; while others do not research individual stocks, but simply buy index funds for the long term. People have made huge fortunes using all these methods, and others have lost everything. Because what truly generates excess returns is never a specific investment label. A confused person adopting the correct investment name will still lose money. Some claim to be value investors, but in reality, they just refuse to cut losses because their stocks are trapped; some say they do growth investing, yet have no idea if the company's growth can translate into cash flow; some claim to invest for the long term, but haven't even figured out how the company makes money before buying; others dollar-cost average into indices, but increase their investment after the market rises and stop buying when it falls. The method is not wrong; the mistake lies in people not truly understanding the method. In my view, for investors to achieve excess returns, they must truly rely on four things: **Correct judgment of facts, assessment of probabilities and potential losses, patient screening of opportunities, and long-term execution of discipline.** I. Making Correct Judgments Based on Facts The starting point of investing is not predicting stock prices, but recognizing facts. How much a company is currently earning, where its growth comes from, whether its competitive advantage is real, whether the industry landscape is stable, and how management allocates capital—these are the foundations of investment judgment. But in reality, many investors do not make judgments based on facts; instead, they form an opinion first and then look for material that supports their view. When bullish on a company, they only focus on positive news; after buying, they turn a blind eye to bad news; when the stock price rises, they believe their judgment was correct; when it falls, they think the market is completely wrong. This is not investment analysis; it is maintaining one's self-esteem. Truly excellent investors must first separate "facts" from "opinions." "This company's revenue has grown rapidly over the past three years" is a fact. "This company will definitely continue high-speed growth over the next ten years" is a judgment. "Artificial intelligence will change the world" may be a correct long-term trend. "All AI company stocks will bring high returns," however, is clearly not the same thing. A great industry can give birth to great companies, but also produce many failures; an excellent enterprise may become a terrible investment due to an excessively high purchase price. An investor's first ability is to see as clearly as possible what exactly they bought, rather than finding a catchy story for their holdings. II. Assessing Probabilities, Rather Than Pursuing Absolute Certainty There is nothing absolutely certain in the investment market. Even a seemingly excellent company may encounter changes in competitive landscape, shifts in technology routes, management errors, regulatory shocks, or even pure accidents. Therefore, investing is not about judging "whether this event will definitely happen," but about judging: What is the probability of this event happening? If the judgment is correct, how much can be earned? If the judgment is wrong, how much will be lost? Can I bear this loss? This is odds thinking. Assume an investment has a 60% success rate; if successful, it yields 100%, but if it fails, it only loses 20%. Even if it doesn't guarantee profit every time, it may still be a worthwhile investment. Conversely, an investment with a 90% probability of gaining 10%, but a 10% probability of losing the entire principal, may not necessarily be a good trade. Many investors only stare at "how much might be earned" and are unwilling to seriously think about "what is the worst-case loss." They treat upside potential as their own return and leave potential risks to be handled in the future. True risk management is not predicting every downturn, but ensuring that even if the judgment is wrong, one is not cleared from the table by a single error. Therefore, achieving excess returns does not require investors to always be right, but requires: To earn enough when right, and control losses when wrong. III. Patient Screening, Rather Forcing Oneself to Act Every Day The investment market trades every day, but that does not mean there are investment-worthy opportunities every day. After entering the market, many people develop a strong impulse to act: feeling that cash in the account is wasted, feeling unproductive if there is no trading for a few days, and worrying about missing opportunities when seeing others make money. Thus, they constantly search for new stocks, new concepts, and new reasons to trade. But truly excellent investment opportunities are inherently scarce. A company needs to simultaneously possess a good business model, sustainable competitive advantages, reliable management, and a reasonable price; such opportunities cannot appear every day. If the standards are strict enough, the conclusion most of the time should be: Wait a bit longer. Buffett and Munger said they do not require themselves to be constantly smart, but only to make correct decisions at a few critical moments. This is precisely the biggest difference between investing and other work. Ordinary jobs often emphasize diligence, efficiency, and quantity completed, but investing does not pay extra rewards just because you trade more frequently. On the contrary, frequent action usually means higher transaction costs, lower judgment standards, and more opportunities to make mistakes. What investors should truly cultivate is not the ability to find opportunities at any time, but the ability to refrain from acting when facing ordinary opportunities. Having money in hand does not mean you must invest immediately. The market rising does not mean you must chase it in. Others making money does not mean those opportunities belong to you. Part of excess returns comes from seizing good opportunities; another part comes from rejecting numerous opportunities that look decent but are actually not good enough. IV. Long-Term Execution of Discipline Understanding a set of methods is not difficult; the difficulty lies in executing them long-term in the real market. When the market rises, everyone is willing to talk about long-termism; but after a real downturn, many people immediately start doubting their strategy. When prices are cheap, people worry they will get cheaper; when prices are expensive, they worry about missing further gains. The market always finds reasons to make investors abandon discipline at the very moment they should stick to it. Therefore, whether an investment system is effective depends not only on whether it is correct on paper, but also on whether the investor can truly execute it. If you adopt a dollar-cost averaging strategy into indices, you must accept significant market volatility and continue buying during downturns. If you adopt a concentrated investment strategy, you must truly understand the enterprise before buying and be able to withstand periods where your holdings significantly lag behind the market. If you engage in arbitrage, you must strictly assess the probability of event completion, time costs, and failure losses, rather than rushing in just because you see a price spread. If you invest in growth companies, you must continuously track the quality of growth, rather than explaining every downturn as the market failing to understand long-term value. Discipline is not about never changing; it is about not changing arbitrarily due to stock prices and emotions. When facts change, investors should adjust their judgments; when facts remain unchanged and only market sentiment changes, investors should remain stable. The truly difficult part is here: we must have both the ability to persist and the ability to admit mistakes. Stubbornness and discipline look similar, but the two are completely different. Discipline is abiding by rules established through rationality; stubbornness is refusing to admit that one's judgment has been overturned by facts. V. Excess Returns Come From Your Unique Advantages So-called excess returns essentially mean you must perform better than the market average in certain aspects. This advantage may come from many places: You may understand a certain industry better than others; You may be better at reading financial statements than others; You may be better at judging management teams than others; You may have a longer investment horizon; You may lack performance assessments and customer redemption pressures; Or you may simply be more patient than most people and better able to withstand volatility. Ordinary investors often believe their disadvantages are less information, less capital, and no professional team. But small investors also possess advantages that institutions rarely have: You can go years without trading; You can hold cash and wait; You can ignore quarterly rankings; You can slowly buy in when the market panics; You also do not need to explain to any client why you are temporarily lagging behind the index. Therefore, investors do not necessarily have to beat Wall Street in information speed, nor predict every market rise and fall. You can completely choose a game that suits you. If you cannot continuously research enterprises, buy indices at low cost and focus your main energy on increasing income and persisting in contributions. If you indeed have deep cognition of a few companies, focus your energy within your circle of competence and do not chase all market hotspots. If you do not find obvious opportunities, wait patiently rather than lowering standards. Excess returns do not necessarily come from doing more; they may also come from making fewer mistakes, having lower costs, and holding longer. Investing ultimately tests not who knows more methods, but who can understand a few truly effective methods more deeply and persist longer. ## Comments (1) - **毛利 · 2026-08-03T03:43:45.000Z · 👍 1**: Wait a bit longer! What investors truly need to cultivate is not the ability to find opportunities at any time, but the ability to refrain from acting when faced with ordinary opportunities.