What Works on Wall Street : A Guide to the Best-Performing Investment Strategies of All Time

by O'Shaughnessy, James P.

• ISBN13: 9780070482463
• ISBN10: 0070482462
• Edition: 2nd
• Format: Hardcover
• Copyright: 1998-05-31
• Publisher: MCG

Summary

"The best investment book of 1996. Very likely, it will be the most influential book on investing in this decade."­­Stock Traders Almanac "...O'Shaughnessy's conclusion that some strategies do produce consistently strong results while others underperform could shake up the investment business."­­Barron's The New York Times and Business Week bestseller, What Works on Wall Street is now updated throughout to include the new data and 50 new sample portfolios. Hailed as "a great book" by Forbes, What Works on Wall Street is a must read for any investor looking to make savvy, historically informed decisions.

Author Biography

James P. O'Shaughnessy is Chairman and CEO of O'Shaughnessy Capital Management, Inc.

Table of Contents

Preface	xv
Acknowledgments	xix
Stock Investment Strategies: Different Methods, Similar Goals	1	(10)
Traditional Active Management Doesn't Work	2	(3)
What's the Problem?	5	(1)
Studying the Wrong Things	5	(1)
Why Indexing Works	6	(2)
Pinpointing Performance	8	(1)
Discipline Is the Key	8	(1)
Consistency Wins	9	(1)
A Structure Portfolio in Action	9	(1)
Overwhelmed by Our Nature	9	(2)
The Unreliable Experts: Getting in the Way of Outstanding Performance	11	(10)
Human Judgment Is Limited	12	(1)
What's the Problem?	13	(1)
Why Models Beat Humans	13	(1)
Base Rates Are Boring	14	(1)
The Individual Versus the Group	15	(1)
Personal Experience Preferred	16	(1)
Simple Versus Complex	16	(1)
A Simple Solution	17	(4)
Rules of the Game	21	(14)
Short Periods Are Valueless	22	(1)
It's Different This Time	22	(1)
Anecdotal Evidence Is Not Enough	23	(1)
Potential Pitfalls	24	(2)
Rules of the Game	26	(9)
Ranking Stocks by Market Capitalization: Size Matters	35	(22)
How Much Better?	37	(4)
Reviewing Stocks by Size	41	(1)
Small Stocks Are the Winners, But Not by Much	42	(5)
Implications for Investors	47	(5)
Our Two Benchmarks	52	(5)
Price-to-Earnings Ratios: Separating the Winners and Losers	57	(22)
The Results	58	(1)
Large Stocks Are Different	58	(6)
High PE Ratios Are Dangerous	64	(4)
Large Stocks Fare No Better	68	(1)
Deciles	69	(1)
Implications	70	(9)
Price-to-Book Ratios: A Better Gauge of Value	79	(22)
The Results	80	(1)
Large Stocks Are Less Volatile	80	(2)
Base Rates More Consistent for Large Stocks	82	(1)
High Price-to-Book Stocks Do Poorly	82	(12)
Deciles	94	(5)
Implications	99	(2)
Price-to-Cashflow Ratios: Using Cash to Determine Value	101	(20)
The Results	102	(1)
Large Stocks Are Less Volatile	102	(6)
High Price-to-Cashflow Ratios Are Dangerous	108	(1)
Large Stocks Hit Too	108	(6)
Deciles	114	(2)
Implications	116	(5)
Price-to-Sales Ratios: The King of the Value Factors	121	(22)
The Results	122	(1)
Large Stocks with Low Price-to-Sales Ratios Do Well	122	(1)
High PSR Stocks Are Toxic	122	(11)
Large Stocks Do a Little Better	133	(1)
Deciles	133	(1)
Implications	134	(9)
Dividend Yields: Buying an Income	143	(14)
The Results	144	(1)
Large Stocks Entirely Different	144	(1)
Deciles	144	(5)
Implications	149	(8)
The Value of Value Factors	157	(14)
Risk Doesn't Always Equal Reward	161	(1)
Is It Worth the Risk?	161	(2)
Embrace Consistency	163	(1)
Large Stocks Are Different	164	(1)
Implications	164	(7)
One-Year Earnings-Per-Share Percentage Changes: Do High Earnings Gains Mean High Performance?	171	(20)
Examining Annual Earnings Changes	172	(3)
Large Stocks Do Worse	175	(1)
Buying Stocks with the Worst Earnings Changes	175	(1)
Large Stocks Do Better	175	(7)
Deciles	182	(8)
Implications	190	(1)
Five-Year Earnings-Per-Share Percentage Changes	191	(14)
The Results	191	(1)
Large Stocks Are Similar	192	(1)
Deciles	192	(11)
Implications	203	(2)
Profit Margins: Do Investors Profit form Corporate Profits?	205	(14)
The Results	205	(1)
Large Stocks Do Slightly Better	206	(1)
Deciles	206	(11)
Implications	217	(2)
Return on Equity	219	(14)
The Results	219	(1)
Large Stocks Do a Bit Worse	220	(1)
Deciles	220	(11)
Implications	231	(2)
Relative Price Strength: Winners Continue to Win	233	(20)
The Results	234	(1)
Large Stocks Do Better	235	(1)
Why Price Performance Works While Other Measures Do Not	235	(5)
Buying the Worst-Performing Stocks	240	(1)
Large Stocks Also Hit	240	(1)
Deciles	240	(12)
Implications	252	(1)
Using Multifactor Models to Improve Performance	253	(18)
Adding Value Factors	253	(1)
What About Other Value Factors?	254	(1)
Price-to-Sales Ratio Better Still	254	(1)
Additional Factors Add Less to Large Stocks	255	(6)
Price-to-Sales Ratio Does Well Too	261	(1)
What About Growth Factors?	261	(5)
Two Growth Models	266	(1)
Return on Equity Does Better Still	266	(3)
Large Stocks Less Dramatic	269	(1)
Implications	269	(2)
Two Multifactor Value Models for All Stocks	271	(8)
Using Several Value Factors	271	(1)
The Results	272	(1)
Value Factors Overlap	272	(3)
A Multifactor Model Using Price-to-Sales Ratios	275	(1)
Implications	275	(4)
Finding Value Among the Market's Leaders: A Cornestone Value Strategy	279	(16)
An Alternative to Indexing to the S&P 500	280	(1)
High PE Ratios Hinder Even Market Leaders	280	(5)
Low PE Ratios Help	285	(1)
High Yield Works Better Still	285	(1)
Better in Bull Markets, Too	286	(1)
Implications	286	(9)
Searching for a Cornerstone Growth Strategy	295	(14)
Traditional Growth Factors Fall Short	296	(1)
Higher Earnings More Valuable	296	(2)
Uniting the Two Models for a Cornerstone Growth Approach	298	(1)
Growth Strategies Are Less Effective with Large Stocks	298	(9)
Implications	307	(2)
Uniting Strategies for the Best Risk-Adjusted Performance	309	(12)
The Results	310	(3)
The United Strategy Also Outperforms Large Stocks	313	(1)
Implications	313	(8)
Ranking the Strategies	321	(18)
The Results	321	(1)
Absolute Returns	322	(5)
Risk	327	(1)
Risk-Adjusted Return	327	(10)
Implications	337	(2)
Getting the Most out of Your Equity Investments	339	(4)
Always Use Strategies	340	(1)
Use Only Strategies Proven over the Long Term	340	(1)
Invest Consistently	341	(1)
Always Bet with the Base Rate	341	(1)
Never Use the Riskiest Strategies	341	(1)
Always Use More Than One Strategy	341	(1)
Use Multifactor Models	342	(1)
Insist on Consistency	342	(1)
The Stock Market Is Not Random	342	(1)
Appendix: Research Methodology	343	(8)
Data	343	(1)
Time Horizon	343	(1)
Universe	343	(1)
Returns	344	(1)
Data Definitions	345	(2)
Formulas	347	(2)
Tases, Commissions, and Market Impact Costs	349	(2)
Bibliography	351	(6)
Index	357