What works on Wall Street
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O’Shaughnessy popularized Mechanical Stock Picking with this best-seller.Portfolios of 50 Stocks are built with simple mechanical strategies, held for 1 year then rebalanced.
More than 50 strategies are backtested over 50+ years and results given for various timeframes of 1 year, 5 years, 10 years…
This is great because it shows how you would have fared over reasonable timeframes. Many books show you performances over very long periods: the compounding effect shows impressive (misleading) gains but nobody has an investment timeframe of 30-50 years.
O’Shaughnessy also provides standard deviations, Sharpe ratios, decile performances (e.g. buy 10% stocks with lowest PE…) and many other statistics. Needless to say, the book includes a fair amount of statistics and tables.
Best strategies include a combination of Value and Momentum. This is likely due to the chosen 1 year rebalancing frequency. Growth Investing is more complex and simple screening strategies are best with Value Investing. A major miss is the absence of a PEG (Price/Earning/Growth) strategy.
In the latest 2005 edition, portfolios of 25 and 10 stocks are also backtested.
We can regret the lack of in-depth analysis of the results. O’Shaughnessy could have provided more explanations as to why a strategy was better than another. The 2005 edition does provide a bit more explanations than previous editions but again it could be better.
This is by opposition to David Dreman’s "Contrarian Investment Strategies: the next generation". Dreman provides in depth explanations as to why Value Investing works better but provides fewer statistics: for instance, Dreman does not provide standard deviation of returns.
Overall, this book is a must for any mechanical investor.
If you are scared with statistics tables, try How to Retire Rich from the same author in which he summarizes the best strategies from “What Works on Wall Street”. In this book, O'Shaughnessy also provides few other mechanical stock picking strategies using high dividend yields.
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