Mechanical Stock Picking and the Presidential Cycle

The following table shows how various mechanical stock picking strategies performed other the 4 years of the presidential cycle. There are James O'Shaughnessy's Cornerstone Growth and Cornerstone Value (1953 to 1996) and Value Line Timeliness Rank 1 portfolio (1965 to 2003).

Stock Picking systemPresidential Cycle YearAverage ReturnStandard Deviation
O'Shaughnessy's Cornerstone Growth112.4%29.7%
O'Shaughnessy's Cornerstone Growth213.2%29.0%
O'Shaughnessy's Cornerstone Growth333.1%22.0%
O'Shaughnessy's Cornerstone Growth428.2%17.5%
O'Shaughnessy's Cornerstone Value110.7%18.2%
O'Shaughnessy's Cornerstone Value211.4%21.5%
O'Shaughnessy's Cornerstone Value326.7%14.0%
O'Shaugnessy's Cornerstone Value418.2%10.9%
Value Line Timeliness #1111.7%21.1%
Value Line Timeliness #123.4%18.1%
Value Line Timeliness #1331.9%16.3%
Value Line Timeliness #1417.2%19.3%
Value Line Timeliness #1 (weekly change)111.9%22.3%
Value Line Timeliness #1 (weekly change)26.5%23.2%
Value Line Timeliness #1 (weekly change)339.7%20.5%
Value Line Timeliness #1 (weekly change)419.2%21.9%


Years 3 and 4 produce outstanding results with mechanical stock picking. Years 1 and 2 are much more volatile so you can greatly reduce the volatility of most mechanical stock picking strategies if you focus on years 3 and 4 of the presidential cycle and shift to more conservative investments in years 1 and 2.

The average returns in years 1 and 2 may look OK (except Value Line in year 2), but the volatility is just crazy so the reward/risk is not really worth. You can save 50% Off your Value Line subscription by subscribing only in years 3 and 4.

James O'Shaughnessy recommends mixing Value and Growth by splitting your portfolio 50% Cornerstone Value and 50% Cornerstone Growth. Now, this means you have a 100 Stocks portfolio. You can in fact have similar returns and risk than his combined strategy if you hold Cornerstone Value in years 1 and 2 and Cornerstone Growth in years 3 and 4 of the presidential cycle. However, in this case you just need a 50 stocks portfolio.

In the latest edition of What Works On Wall Street, he did test 25 Stocks portfolio; in this case combining Growth and Value will result in 50 stocks only, however volatility increases. Now, you can also use Cornerstone Value 25 stocks in years 1 and 2 and Cornerstone Growth 25 stocks in years 3 and 4. You just need 25 stocks: this is much more practical for individual investors.


See also:
Stock Picking and Best 6 months Market Timing

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