Product Description

"A major contribution . . . on the behavior of common stocks in the United States."
--Financial Analysts' Journal

The consistently bestselling What Works on Wall Street explores the investment strategies that have provided the best returns over the past 50 years--and which are the top performers today. The third edition of this BusinessWeek and New York Times bestseller contains more than 50 percent new material and is designed to help you reshape your investment strategies for both the postbubble market and the dramatically changed political landscape.

Packed with all-new charts, data, tables, and analyses, this updated classic allows you to directly compare popular stockpicking strategies and their results--creating a more comprehensive understanding of the intricate and often confusing investment process. Providing fresh insights into time-tested strategies, it examines:

• Value versus growth strategies
• P/E ratios versus price-to-sales
• Small-cap investing, seasonality, and more

Product Details

• Amazon Sales Rank: #92027 in Books
• Published on: 2005-05-24
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 366 pages

Amazon.com Review
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.

Review
"What Works on Wall Street is indisputably a major contribution to empirical research on the behavior of common stocks in the United States." - Financial Analysts' Journal

Review
``. . .analysts praised his stock-picking strategy, explained in his well-received book. In it, he digs into more than 40 years of data to find out what strategies would have picked the winning stocks.'' (The Wall Street Journal )

Customer Reviews

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 example another strategy might be to measure the performance of all stocks that begin with the letters h,l,m,n, and p. There are many other strategies which have given higher returns in the past than the S&P 500 strategy, some for no logical reason, others with a certain logic. Examples of logical strategies include a disciplined small cap strategy, or a disciplined low price to sales strategy or a disciplined high yield strategy etc. Some of those strategies also performed more consistently than the S&P 500 strategy, ie with less risk.

For example if in the 1950s the editors at Dow Jones had decided to revamp the index buying the 50 stocks with the lowest price to sales ratio, then the Dow Jones Industrial Index would be at 4 times the level of today.

People want to believe the present is different from the past. The price of a stock is still determined by people. As long as people let fear, greed, hope and ignorance cloud their judgement they will continue to mis-price stocks and provide opportunities to those who rigorously use simple time tested strategies to pick stocks. Names change, industries change. Styles come in and out of fashion, but the underlying characteristics that identify a good or bad investment remain the same.

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, or stocks in trouble.

O'Shaughnessy then goes on to discuss relative strength stocks and growth-momentum measures. He shows how portfolios selected on multiple criteria can outperform portfolios selected on only a single criteria (such as low PSR). Given the annual rebalancing of the test portfolios, maybe having a strong relative strength stock makes sense and it certainly improved the results. But, one question remains: How do individual investors benefit from this knowledge?

One possibility would be to hold 50-stock portfolios and do as O'Shaughnessy recommends. However, many investors will not want to hold 50 stocks, nor rebalance their portfolios annually. For investors who buy-and-hold only a few select stocks, adopting O'Shaughessy's methods would demand a major change in thinking.

"What Works On Wall Street" also makes clear that criteria have different significance for different market capitalization stocks. In particular, small stocks and big stocks are not the same. Or, as many value investors already know, value is best applied to larger more established companies.

I have only touched upon a few of the findings of "What Works On Wall Street."

While, I enjoyed this book (and even though I have a degree in math), I haven't evaluate the quality of the statistical studies (as mentioned by other reviewers as a concern). And, as pointed out, few long-term investors will want to turn over their portfolios as aggressively as such a strategy demands. Further, the results of these studies support my own views about the superiority of low PSR stocks and value stocks and avoiding high p/e stocks. So, I'm probably predisposed to like the book for that reason. This book certainly shouldn't be the only investment book you read, but it might give investors some insight.

For example, there is a discussion of the small firm effect and how very small companies benefit the most from such an effect. In particular, many mutual funds only purchase stock in companies with a certain total market capitalization and small companies that cross this threshold often show expectional returns. Again, I'm not exactly sure how you'd benefit from this (or if you'd want to try!), but it's one more thing to think about.

Peter Hupalo, Author of "Becoming An Investor"

New edition, new data.
I work with Jim O'Shaughnessy and I would just like to clarify Mr. McMahan's comment on the data in the new edition. The newest edition of What Works on Wall Street does in fact contain updated data through the end of 2003. The prior editions were through 1994 and 1996, so in addition to new series, monthly analysis and several new chapters there are also seven more years of data.

As a biased observer (I would have omitted my star rating but Amazon won't allow me to post without it) I will refrain from commenting on the other statements appearing here, but should people be interested in judging for themselves please be careful that the edition purchased from Amazon is from May 2005.