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

by James P. O'Shaughnessy

Book Overview

Historically tested long-term strategies that always outperform the market"O'Shaughnessy's conclusion that some strategies do produce consistently strong results while others underperform could shake... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0070482462
• ISBN13: 9780070482463
• Release Date: May 1998
• Publisher: McGraw-Hill Companies
• Length: 325 Pages
• Weight: 2.03 lbs.
• Dimensions: 1.4" x 7.6" x 9.4"

Customer Reviews

This was the first investing book that made any sense to me!

I am an engineer and geek at heart. This was the first investing book that I have read that gave me all the data that I could ever want to back up what was asserted in the conclusions. He gives clear directions on how to pick a 25 - 50 stock portfolio that over any rolling 5 year period will seriously out perform the market. I bought the first edition and had a paper portfolio for a few years before I made the plunge and invested real money. My 50 stock portfolio that has 25 stocks from the Cornerstone growth formula and 25 from Cornerstone value has averaged better than 26% annual returns over the last three years. I created the portfolios inside a self directed IRA, so I don't have the tax consequences for rebalancing every year. And, the returns mentioned about include spending $10 per trade in my Ameritrade account. If you're not into all the data, buy his book "How to Retire Rich". It's a recap of this book and is an easier read than "What Works on Wall Street." In "How to Retire Rich" he calls Cornerstone Value "Leaders with Luster" and Cornerstone Growth is "Reasonable Runaways." In the 3rd edition of "What Works on Wall Street" he tweaks the value screen to include a test for shareholder yield. If you get to the point of buying "How to Retire Rich" and using the strategies from that book, check out the 3rd edition of "What Works on Wall Street", Chapter 19, for an explanation of shareholder yield. This book has put my retirement plans back on track and I'm confident that I will be able now to retire with enough money to live comfortably.

O'Shaughnessy has been proven right

This book has born out its wisdom. The two funds that are patented that fool his strategy have been phenomenal. HFCGX is the patented fund based on his top idea of Cornerstone Growth; over the last 5 years it has had an average return of 13.44% per year vs. the Vanguard 500's -2.01% per year (6/1/00 through 5/31/05). HFCVX is the patented fund based on his 2nd to best idea of Cornerstone Value; over the last 5 years it has had an average return of 6.47% per year vs. the Vanguard 500's -2.01% per year (6/1/00 through 5/31/05). The most interesting point is that the author points out that investors often are to emotionally involved to have the discipline to see the strategy through. Not only did the first reviewer bash the book because he did like the returns strategy one year after the book came out, but Mr. O'Shaughnessy sold the funds to Hennessy Funds at the end of 1999 after it failed to surpass the returns of the bubble that soon after collapsed. Seven years after it was published an investor would be much wealthier had they followed the books top strategy instead of the investors who dogpiled onto the stocks of the market's bubble. THIS BOOK is my all time #1 resource for stock investing. Five Stars.

I enjoyed reading this book, but am not sure it is practical

"What Works On Wall Street" is one of my favorite investment books. Previously, I had read "Invest Like The Best," also by James P. O'Shaughnessy, and I wasn't overly impressed. "Invest Like The Best" made it sound as if all you needed was Value Screen, or some other online stock-screening software, and you would easily match and equal the best money managers, regardless of their investment strategy. This could be done because their portfolios always held certain types of stocks, such as high 5-year's earning growth rate stocks. Now obviously, great investors, like Peter Lynch, have portfolios that consist of different types of stocks, such as growth stocks and some value plays. So, such a strategy seemed at best naive. Worse, O'Shaughnessy made it sound like achieving 20% or great returns was child's play. My only conclusion was that O'Shaughnessy was a child of the great bull market of the later 1980's and 1990's and that he had little real knowledge to offer investors. "Invest Like The Best" seemed like a book that would mislead the new investor. So, I wasn't too impressed when I heard O'Shaughnessy had a new investing book out," What Works On Wall Street." I almost didn't read it, but heard good mentions of it from people whose investment experience I respected, so I decided to give the book a look. I'm glad I did! Using Standard & Poor's Compustat database, O'Shaughessy put together 50-stock portfolios of certain kinds of stocks (for example, the 50 lowest Price-to-sales ratio stocks, the highest Price-to-sales ratio stocks, etc.). He examined all the measures that most investors rely upon, including PSR's, P/E's, Price-to-cash-flow, Price-to-Book, etc. The results showed that "value does will out." The strongest and best indicator of solid appreciation stocks were low PSR's (Price-to-Sales Ratios) which were pioneered by Ken Fisher in Super Stocks. Low PSR stocks sell for low multiples of their sales revenue. Next up in usefulness were the more complicated Price-to-cash-flow and price-to-book ratios. Again buying value based upon those criteria proved a winning strategy. Further, buying the high-priced stocks under any of these criteria lead to below average market returns. In other words, don't pay too much for your investments. The portfolios were rebalanced annually. It was not surprising that overvalued stocks were punished in the long-run, or that stocks bought at value appreciated well, but what was shocking was the extent to which low PSR stocks blew away low P/E stocks. In other words, seeking value based upon low PSR was far more productive. Exactly why this is still needs to be determined. Low PSR stocks should not only point to unpopular stocks, but also have a bias toward low-profit margin businesses, which is a stunning result. No compensation was made for the difference in average profit margins for different industries. So it is possible that low PSR served as a surrogate for some other factor, maybe turnaround companies, o

Buy value sell fashion, winners win and losers lose.

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 exam