88 of 90 people found the following review helpful:
5.0 out of 5 stars
Buy value sell fashion, winners win and losers lose., March 5, 2001
This review is from: What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time (Hardcover)
What Works on Wall Street? According to a study of 45 years of stock market data in a book called "What works on Wall Street" by O'Shaughnesy he came to the conclusion that some strategies would have produced greater returns than the S&P 500 whilst others produced less. He tested a range of strategies, re-balancing the strategies annually, with each strategy involving the 50 stocks which met the criteria for inclusion.
The worst strategy that you could have adopted was to buy last year's losers each year. The message is clear - losers carried on being losers. Sometimes the weak beats the strong, but it's not the way to bet your money.
The next ten worst strategies involved buying Companies on high multiples such as high price to sales ratio companies. These companies were generally on high multiples because they were thought to be high growth or sexy companies with lots of potential. They were the then current stock market darlings that investors were prepared to pay up for in order to join in with the latest investment fad or fashion.
As far as the best performing strategies are concerned, he found that the top 6 strategies all involved buying companies with high relative strength in combination with a value factor such as low p/e or low price to sales ratio. These companies were generally on low multiples because they were in out of favour sectors or old economy share that had been overlooked. By combining it with high relative strength (i.e. shares which were rising), these strategies caught those shares whose under-valuation was finally starting to be recognised by the market.
The book found that over long periods, adopting the following rules would have proved to be more profitable than buying the S&P 500: Low price to sales stocks out-perform the higher p/s stocks. Low price to cash flow stocks do better than high p/cfl stocks. Low price to book stocks tend to perform better than high p/b stocks. Other conclusions reached in the book are as follows: Price to sales ratio is the best single value ratio to use for buying market beating stocks. Last years biggest losers are the worst stocks you can buy. Last years earnings gains alone are worthless when determining if a stock is a good investment. You can do four times as well as the S&P 500 by concentrating on large well known stocks with high dividend yields. Relative strength is the only growth variable that consistently beats the market.
Buying Wall Street's current darlings with the highest price to earnings ratios is one of the worst things you can do.
Other lines from the book: Growth investors believe in a Company's potential and think a stock's price will rise with its earnings.
Value investors believe in a company's balance sheet, thinking a stock's price will eventually rise to meet its intrinsic value.
The S&P 500 tracker strategy is a strategy making disciplined bets on large cap companies. This strategy is just one of hundreds of strategies which could exist. For example another strategy might be to measure the performance of all stocks that begin with the letters h,l,m,n, and p. There are many other strategies which have given higher returns in the past than the S&P 500 strategy, some for no logical reason, others with a certain logic. Examples of logical strategies include a disciplined small cap strategy, or a disciplined low price to sales strategy or a disciplined high yield strategy etc. Some of those strategies also performed more consistently than the S&P 500 strategy, ie with less risk.
For example if in the 1950s the editors at Dow Jones had decided to revamp the index buying the 50 stocks with the lowest price to sales ratio, then the Dow Jones Industrial Index would be at 4 times the level of today.
People want to believe the present is different from the past. The price of a stock is still determined by people. As long as people let fear, greed, hope and ignorance cloud their judgement they will continue to mis-price stocks and provide opportunities to those who rigorously use simple time tested strategies to pick stocks. Names change, industries change. Styles come in and out of fashion, but the underlying characteristics that identify a good or bad investment remain the same.
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26 of 26 people found the following review helpful:
5.0 out of 5 stars
New edition, new data., October 5, 2005
I work with Jim O'Shaughnessy and I would just like to clarify Mr. McMahan's comment on the data in the new edition. The newest edition of What Works on Wall Street does in fact contain updated data through the end of 2003. The prior editions were through 1994 and 1996, so in addition to new series, monthly analysis and several new chapters there are also seven more years of data.
As a biased observer (I would have omitted my star rating but Amazon won't allow me to post without it) I will refrain from commenting on the other statements appearing here, but should people be interested in judging for themselves please be careful that the edition purchased from Amazon is from May 2005.
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18 of 18 people found the following review helpful:
4.0 out of 5 stars
Common Sense Leads To Un-Common Performance !!, May 27, 2004
James O'Shaughnnessy's book is the latest to engage the Age Old Question: growth stocks or value stocks? Instead of focusing on those 2 sectors specifically, he meticulously looks at the multi-decade history of various metrics -- price-sales, price-book, price-earnings, etc -- in making sound investment decisions.
The books major highlights are as follows:
(1) A bent towards small and microcap stocks, particularly value-oriented stocks, works very well. Buying microcaps is difficult for institutions but NOT for most individual investors.
(2) Price-sales is underused as a method for finding good (value) stocks and market-beating performance.
(3) Price-earnings and dividend yield are also good indicators, especially in the context of larger cap stocks.
(4) Value edges out growth. (NOTE: The starting and ending points for measuring long-term cycles are so important that changing the dates by a few years can often reverse the results. While value stock investing might have a slight edge in the time frames studied in "What Works On Wall Street", keep in mind that depending on where growth and value stocks are in their respective cycles when you decide to invest is very important to your portfolio choices. For instance, after a big value runup, growth stocks often outperform for a decade or so.)
(5) Using more than 1 metric is important in helping outperformance while reducing risk/volatility.
The book has tons of data and backs up its claims well. Keep in mind, this book was published in 1998 with the data going through 1996. Had the data stopped at 1999, the results would have looked VERY DIFFERENT! And, of course, had it been updated through recent years, different again.
All in all, a very worthwhile book, though you can get lost and immersed in so many numbers at various times that you forget "the big picture" which thankfully O'Shaugnnessey repeats often enough to make sure the reader comes away with the basics.
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