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

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MBA Course Material
Interesting data, questionable utility for most
Right on the money
The best stock tactics of all time:with proof
Disappointed - a small investor review

What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time
James P. O'Shaughnessy
Manufacturer: McGraw-Hill
ProductGroup: Book
Binding: Hardcover

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ASIN: 0070482462

Amazon.com

Investors -- be they aggressive or conservative, self-directed or professionally managed -- are always on the lookout for an edge. And in James O'Shaughnessy's What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time, they'll find a solid one: authoritative analysis of popular practices from the past. The author examines three decades of stock market data to show how 15 of the most common investment tactics have fared over time.

Book Description

"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.

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This consistently bestselling guide explores the investment strategies that have provided the best returns over the past 50 years--and which are the top performers today.

Customer Reviews:

MBA Course Material.......2007-06-12

I am fortunate enough to be taking a class on investment strategy. This is the book we use. We also have access to the compustat database to test trading theories. Thus far, I have been able to get a 44.1% return with a corresponding Sharpe ratio of 1.22 through the database using the methods outlined in this book. Using compustat could not be easier. You enter the criteria you want to filter for (there are literally thousands of built in criteria) and it builds the model by buying the stock at the beginning of the time period and selling it at the end. It does this for the specified amount of time. Mine is every 12 months and it has been run over a 20 year period. So it buys and sells 20 times over the course of the model. I beat the S&P 17 of the 20 years and my worst 'down' period was -8.37%. I just hope I have the discipline to follow through with this model, look out Warren! there is a new oracle in town.

There are over 22,000 companies in the database and I will forever use it to guide me.

Interesting data, questionable utility for most.......2007-01-30

I am of mixed opinion on this book. I think it's probably a 4-star for me, but likely to be less useful (thus deserving a lower rating) for many others.

First, the good:

The author has access to the Compustat database, generally considered the gold standard for this kind of research, with the cleanest data. Many other databases exclude companies that are no longer active, which can cause HUGE distortions in long term analyses.

He uses this data to test a variety of "hard rules" based strategies. These strategies mainly consist of selecting the 50 best and 50 worst stocks within the database, which has 8000 companies, though in many cases he restricts the tests to the larger stocks, for reasons he outlines (that I accept as valid).

Most of the book consists of chapter-at-a-time analyses of these strategies. In general, he finds superior risk-adjusted returns to certain value-oriented strategies, and also to the use of 1-year price momentum (stocks that had good price movement last year will overperform this year).

Now the bad:

Still, most of these strategies are rather riskier than owning a broad index. And that's WITH the use of 50 stock baskets, rebalanced annually, for each of his strategies. As other reviewers have mentioned, that implies a lot of transactions, far more than most individual investors would do. You could use smaller baskets (fewer stocks), but your risk would be even higher (less diversification).

Later in the book, he moves into multi-factor strategies (i.e. buy the 50 highest stocks where condition A is true, rank-ordered by condition B). On the one had, some of these strategies yield MUCH higher returns than both the single factor strategies and the market as a whole. On the other hand, there's far more room with these strategies for data mining - combining each of his single factor strategies (there would logically be MANY permutations), until he gets the biggest winners, then presenting only those cases.

Also, the primary database he's using (CompuStat) is prohibitively expensive for most individual investors. So if an individual investor want to test permutations of these strategies, that would be difficult. There are some links to websites with accessible data, but I haven't thoroughly investigated those, and doubt their datasets are as good as CompuStat's.

Finally, his multi-factor strategies amount mainly to screens. At their most complex, he winnows the dataset by a small handful of factors (using an absolute test - a stock is IN or OUT), then ranks the survivors and chooses the 50 best according to his final factor. To me, it would make more sense to develop weighted models. Develop a weight for each of 3..N factors, supplemented by perhaps a couple of screens to remove certain stocks with suspect data, then pick the 50 highest. He mentions towards the end of the book that he does the money he manages, but he doesn't include those results/models here for the rest of us.

Conclusion:

I know this sounds like an awful lot of criticism. Nonetheless, there was a lot to like about this book for the advanced investor. I have not seen such a detailed study on CompuStat data. His use of the best data, and inclusion of risk statistics is illuminating. And I like his emphasis on hard numeric data/analysis, rather than 'gut feel' that is common in the investment community (i.e. IBM's new product X looks like a hit. I give IBM a **BUY**).

Still, I doubt more than a handful of readers will be able to put his ideas into practice. Still, if you, like me, want to see the numbers on various investment concepts, using reliable data, I would recommend this book.

Right on the money.......2006-11-22

This book should be read in conjunction with the author's other books. After reading his much simpler, "How to Retire Rich" some 5 years ago or more and with a "wealth" of relatively poor investment experience under my belt it was clear to me that Reasonable Runaways was the way to go. However, there were a number of uncertainties. The basic question the author was answering - how do I maximize a lump sum I have now over the long term i.e. 15, 20 years or more - was not exactly the same as the question I was trying to answer. My problem was - how can I invest regular monthly surplus sums from my salary and maximize the value over the long term. It took me a few months to figure out that I could do it. Instead of rebalancing the entire portfolio once a year I rebalance a 12th part of it every month. I am therefore "rebalancing" i.e. selling what I bought 12 months (plus a day) ago and purchasing the next few stocks that pop out of my Reasonable Runaway's screener that I don't already own. Of course the math is a little convoluted and I am never really going to get the rebalancing absolutely correct but I still end up with a pretty well diversified portfolio that I am regularly turning over on a steady and most importantly unemotional objective basis. When I analyze the performance on a trade by trade basis I find the inevitable reversion to the mean. After a total of 109 trades I have calculated an average annualized performance (for simplicity and tax reasons I extended the holding period to 13 months) of 21%. What is more this average performance is quite stable over the last year or two. I still have a spectacular variance in individual performance but the net result at the end of each year averages out in the healthy positive direction. The more I have been doing this since starting in May 2002 the more I am asking myself why there isn't a massive crowd of investors buying those buys just before me and selling them just before me driving my purchase prices up my selling prices down and my profits into the cellar. The answer is clearly to be found in the author's recent third book "Predicting the Markets of Tomorrow". It appears that there is only a very small crowd of us out there who can stomach the ups and the downs and ride out the course. I've tried to figure out whether the author knows that his strategies when spread out on a rolling basis - as I describe above - give the investor a much steadier and healthier performance and therefore much less emotionally challenging ride. I also suspect that my approach of buying the next stocks down the list on the screener every month means that I am often buying the stocks that most recently arrived on the list and possibly more likely therefore to perform better. But then I am still an amateur at this and decided not to break my head any further. Back to "What Works on Wall Street". There is a really exciting part (sad isn't it but seriously when you see how well this stuff works it is a lot of fun) when he explains how tweaking or combining the value strategies reduces volatility and improves overall return. When I read that I assumed he was going to expand further but the point sort of got lost and I'll have to do a re-read to find it again. As an amateur I am also stuck with internet stock screeners and not all of them give you the parameters or the level of detail you need to get the screener working exactly as you need. The best advice on that is given at the end of "Predicting the Markets of Tomorrow" fortunately for me I worked that out for myself years ago. If you are like me you will end up reading just the main text and skimming over the tables. Do I recommend this book? Well put it like this - I am pretty certain that I will be retiring rich thanks to Mr. O'Shaughnessy (Seriously Sir if you do ever read this, my sincere gratitude.) I am just surprised to discover that there seem to be so few of us out there able to pick up on this and follow through.

The best stock tactics of all time:with proof.......2006-08-31

This is the rare 5 star ***** book. It is no nonsense and gives you exactly what its title suggests. It shows what has really worked on Wall Street from 1951 to 1996 by using the Standard and Poors compustat data base to simulate what would have happened if an investor (or mutual fund) would have bought the top 50 stocks meeting the criteria measurement. Example: Highest P/E ratios, top 50 price increases, top 50 price decreases, best dividends, high or low book to price value, etc.He goes further by breaking the top 50 into only the large cap meeting this criteria and if he bought out of all stocks available. He measures stocks and their performance from almost every imaginable angle. It is fascinating and educational to see what the final dollar amount is for each investment approach. He also shows how each style performed in each decade and how each percentile of stock did in each category.(Example: how the top 5 stocks did with low P/E's versus the bottom 5 in the top 50 stock group, this helps the individual stock investor focus his investments).

Here are the books big findings. If you took $10,000 and invested it in 1951 and invested it in the following top 50 stocks that met the following criteria, while resetting it every year to match your criteria, in 1996 you would have had:

Top 3 ways to invest
PSR<1,high relative strength,All stocks $12,999,698
Earnings yield>5,High relative strength,All stocks $12,570,451
Price/Book<1,High relative strength,all stocks $12,552,352

Worst 3 ways to invest
Lowest 1-year relative strength, All stocks $29,666
High PSR, All stocks $64,220
High Pcfl,All Stocks $224,741

I really like this book because It is scientific, not opionated and shows that Warren Buffet was right all a long, buy stocks that are a great value based on their sales, and price to book with low P/E's and strong relative price strength and you will always win in the long term.

Disappointed - a small investor review.......2006-08-21

I was disappointed with the book. It was not as helpful for the small, individual investor as I wanted it to be. $10,000 spread over 50 stocks means investing $200 per stock without even talking about any fees for buying and selling 50 different stocks. So from this book I can narrow down my indivual selection of stocks to 25 or 50, but if I only want to purchase 3-5 stocks how do I decide which 3-5 of the 50 to buy?

The book did give me a broader understanding of the different strategies used behind mutual funds. When I review a mutual fund's strategy, now I know the lingo and what the fund manager is looking for in a stock and how that strategy compares to other strategies. So I think the book has made me a better mutual fund shopper, but has not helped me as much in purchasing individual stocks.

Average customer rating:

What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time
James P. O'Shaughnessy
Manufacturer: Mcgraw-Hill
ProductGroup: Book
Binding: Paperback
ASIN: B000OFJ5T8

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