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What Works on Wall Street, Fourth Edition: The Classic Guide to the Best-Performing Investment Strategies of All Time Hardcover – November 14, 2011
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About the Author
James P. O’Shaughnessy is chairman and CEO of O’Shaughnessy Asset Management. He previously served as portfolio manager, director of systematic equity, and senior managing director for Bear Stearns. O’Shaughnessy is the author of the bestsellers What Works on Wall Street, How to Retire Rich, Invest Like the Best, and Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years.
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In this book, there are a few opinions. Thankfully, these opinions will not negatively impact the reader as they generally relate in the first part of the book to the author's belief in evolution. Later on, his opinions reflect what he believes the data shows and that's not really so bad as the data really speaks for itself. I hardly ever take the time to read those parts of the book that are written in paragraphs and instead concentrate on the tables, which, other than in the first part of the book, make up most of the important information that the reader should know.
What this book does is shows people how concentrating on the data achieves greater returns than the market achieves in general. It also shows that by doing this the chances of you beating the market improve the longer you trade this way. If I had to place themes on this book I would say that they are profitability, safety, and predictability. Much of what is in the book relates to one of these three themes. People should understand that there are ways to make bigger overall returns while achieving more safety and having a less bumpy ride in the stock market. People seem to think that risk is equal to reward. However, this book shows that to simply be untrue.
Since purchasing the book, I have collected several sets of stock market data. Using the data in the book, I have created several portfolios that have beat all the indexes that I have compared them to. The person that reads this book and immediately applies their new understanding will indeed be able to create portfolios that beat the market (if they have access to value investing market data). However, I heavily recommend that people read those tables of information again and again. There is information there that can be seen and yet sometimes it is not said so directly that the reader will achieve a full understanding of what the information means when you are referencing multiple tables at the same time. Looking at all the data, I have improved my own system that was built entirely upon what was in this book several times.
Readers will have a general understanding of the book the first time they read it. However, that understanding will be shallow. Yes, they can and will achieve good results if they consistently apply that data to long-term investing. However, gaining a deeper understanding of what the book is showing will enable the reader to create even better portfolios.
The long term single factor criteria are likely to be fairly reliable -- long-term, but as shown repeatedly not always reliable in the here-and-now. Perhaps we can find the courage to hang on for the long-term fabled return, or perhaps as the saying goes, in the long-term we're all dead.
The even more complex composite factors, then layered with even more factors, are where the murmurs of data mining seem to come whispering in my ear. It's this approach that the author recommends you follow, pretty much to hedge your bets.
Already the star single factor in earlier editions of this book, price to sales, has fallen to a usurper EV/EBITDA. The real issue is probably whether you trust your own subjective judgment, with all your own special insights, or if you accept that you'll be caught up in the madness of the crowds and should let your computer assess the numbers with a hope that history repeats.
this fourth edition (2012) has studies of each of the 10 economic sectors. well done and very valuable. there are a couple of sectors that are just dripping with alpha potential
remember to maximize your tax efficiency by holding these more than the defined 1 year. the low long term capital gains tax rate is a big break. otherwise, under the burden of ordinary income tax rates, you can cut your compounding in half and there goes your edge, or worse.
in the dividend chapter, he describes an enhanced dividend income producing strategy. check that.