Counter to conventional value investing wisdom, a low Price-to-Earnings (P/E) ratio is often a "value trap" that exists for a valid, negative reason. A high P/E, conversely, is a more reliable indicator that a stock may be overvalued and worth selling. This suggests avoiding cheap stocks is more important than simply finding them.

A crucial, yet unquantifiable, component of alpha is avoiding catastrophic losses. Jeff Aronson points to spending years analyzing companies his firm ultimately passed on. While this discipline doesn't appear as a positive return on a performance sheet, the act of rigorously saying "no" is a real, though invisible, driver of long-term success.

Aggregate profitability can mask serious issues. A company's positive bottom line might be propped up by one highly profitable offer while another "bestseller" is actually losing money on every sale. This requires a granular, per-product profitability analysis to uncover.

David Kaiser reveals his model specifically limits exposure to financial stocks. Because financials frequently screen cheap on metrics like price-to-book, a pure value model can become dangerously over-concentrated in the sector. The limit is a pragmatic override to ensure diversification and avoid the unique, often hidden risks inherent in banks.

The firm doesn't just decide a factor is obsolete. Their process begins by observing within their transparent 'glass box' model that a factor (like book-to-price) is driving fewer and fewer trades. This observation prompts a formal backtest to confirm its removal won't harm performance.

If your core thesis can be replicated by a 5-second Yahoo Finance screener (e.g., low P/E ratio), it has been arbitraged away by quants and computers. Relying on such simplistic metrics is no longer just a zero-alpha strategy, but one likely to produce negative returns.

While many stock metrics require interpretation, a negative Earnings Per Share (EPS) is an unambiguous red flag. It moves beyond abstract ratios and volatility to state a simple fact: the company is not profitable and is losing money on a per-share basis.

Companies reporting losses under GAAP rules aren't always bad investments. If losses stem from expensing intangible investments like R&D, they are 'GAP losers' with strong economics. Historically, this cohort has delivered higher returns than both consistently profitable companies and 'real losers'.

Instead of focusing on vague metrics like management or margins, the primary measure of a "good business" should be its fundamental return on invested capital (ROIC). This first-principles, quantitative approach is the foundation for sound credit underwriting, especially in illiquid deals.