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

348 Pages·1996·15.75 MB·English

by  James P. O'Shaughnessy

What Works
on Wall Street
A Guide to the Best-Performing
Investment Strategies
ofAl1 TIme
James P. O'Shaughnessy
McGraw-Hill
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LibraryofCongressCataloging-in-PublicationData
O'Shaughnessy,JamesP.
WhatworksonWallStreet : aguidetothebest-performinginvestmentstrategies
ofalltime / JamesP.O'Shaughnessy.
p. em.
Includesbibliographicalreferencesandindex.
ISBN0-07-047985-2
1. Investments-UnitedStates. 2. Investmentanalysis-UnitedStates. I. Title.
HG4910.0828 1996
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Copyright © 1997 by James P. O'Shaughnessy. All rights reserved.
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Contents
Preface xv
Acknowledgments xix
1. Stock Investment Strategies: Different Methods,
SilDDar Goals 1
TraditionalActiveManagementDoesn'tWork 2
What's the Problem? 5
StudyingtheWrongThings 5
WhyIndexingWorks 6
PinpointingPerformance 6
DisciplineIs the Key 8
ConsistencyWins 8
AStructured Portfolio inAction 9
OverwhelmedbyOurNature 9
2. The Unreliable Experts: Getting iD the Way of
Outstanding Performance 11
HumanJudgmentIs Limited 12
What's the Problem? 13
WhyModels BeatHumans 13
BaseRatesAre Boring 14
The IndividualVersus the Group 15
PersonalExperience Preferred 16
SimpleVersus Complex 16
ASimpleSolution 17
Contents
3. Rales ofthe Game 21
ShortPeriodsAreValueless 22
It's DifferentThisTime 22
Anecdotal Evidence Is NotEnough 23
Potential Pitfalls 24
Rules oftheGame 26
4. Ranking Stocks by Market Capitalization: Size
Matters 33
HowMuch Better? 35
ReviewingStocksbySize 39
AllStocksIs theWinner 40
Implicationsfor Investors 49
OurTwo Benchmarks 50
5. Price-to-Earnings Ratios: Separating the Winners and
Losers 51
The Results 52
Large StocksAreDifferent 52
High PE RatiosAre Dangerous 58
LargeStocks Fare No Better 63
Implications 64
8. Price-to-Book Ratios: A Better Gauge ofValue 89
The Results 70
Large StocksAreLessVolatile 70
Large Stocks BaseRates More Consistent 72
High Price-to-BookStocks Do,Poorly 72
Implications 84
7. Price-to-Cashflow Ratios: Using Cash to Determine
Value 87
The Results 88
Large StocksAreLessVolatile 88
High Price-to-CashflowRatiosAre Dangerous 94
LargeStocks HitToo 94
Implications 102
8. Price-to-Sales Ratios: The King ofthe Value
l'actors 105
The Results 106
LargeStockswith LowPrice-to-Sales Ratios DoWell 106
Contents
High PSRStocksAreToxic 106
LargeStocks Do a Little Better 113
Implications 118
9. DividendYields: Baying an Income 123
The Results 124
LargeStocksEntirelyDifferent 124
Implications 124
10. The Value ofValae Factors 133
RiskDoesn'tAlways EqualReward 133
Is ItWorththe Risk? 138
Embrace Consistency 138
LargeStocksAreDifferent 139
Implications 139
11. One-Year Earnings-Per-Share Percentage Changes:
Do High Earnings Gains Mean High Performance? 145
ExaminingAnnualEarnings Changes 146
LargeStocks DoWorse 149
BuyingStockswiththeWorstEarnings Changes 149
LargeStocks Do Better 149
Implications 156
12. Five-Year Earniags-Per-Share Percentage Changes 161
The Results 161
Large StocksAreSimilar 162
Implications 162
13. Profit Margins: Do lavestors Profit from Corporate
Profits? 171
The Results 171
LargeStocks DoSlightlyBetter 172
Implications 172
14. Retura on Equity 181
The Results 181
LargeStocks Do a BitWorse 182
Implications 182