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What Works on Wall Street

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What Works on Wall Street

A Guide to the Best-Performing Investment Strategies of All Time

McGraw-Hill,

15 min read
10 take-aways
Text available

What's inside?

Believe it or not, there were once time-tested rules that guided investment strategies. Read what worked — and what didn’t — in the 45 years before the Internet bubble left Earth.

Editorial Rating

6

Qualities

  • Applicable

Recommendation

Individual investors are constantly frustrated by their inability to beat the market. Most portfolios lag behind benchmarks because investors fall in love with sexy stories and chase stocks with high valuations. Such a strategy (if undisciplined buying and selling can be called a strategy) is exactly the wrong tack to take. James O’Shaughnessy painstakingly tracked stock returns over a 45-year period and found that investing in companies on traditional value measures - PE ratios, price-to-sales ratios, and price-to-book ratios - beat the market. Unfortunately for today’s investors, the data for this study runs only through 1996, and misses much of Internet boom, in which traditional measures like PE ratios were abandoned with abandon. Nevertheless, getAbstract.com recommends this clear and insightful book to all investors, especially those newcomers who have to this point been carried along by the market bandwagon, but one day might need a crash course in some time-tested investment strategies.

Summary

The Power of Passivity

Want to beat the stock market? Don’t bother chasing tips or trying to outguess the competition. In fact, don’t even bother to actively manage your money. Passive management beats the market with less risk than is incurred with actively managed portfolios. Investing in companies based on traditional value measures will make money. Combining measures such as price-to-book or price-to-sales with strong price appreciation yields even better results.

Stock investors can be passive or active. Passive investors rely on index funds that represent the market, such as the Standard & Poor’s 500. Active investors try to beat the market by picking stocks. They follow one of two strategies. Growth investors seek a company with potential and hope its stock will rise. Value investors look for undervalued stocks.

However, active investors rarely beat the market. During the ten years ending in 1994, only a quarter of actively managed mutual funds beat the S&P 500. Fewer than half of those funds outpaced the index by more than 2%. Therefore, passive investing has gained popularity. Index funds have boomed from $10 billion in 1980 to $250 billion in...

About the Author

James P. O’Shaughnessy is chairman and CEO of O’Shaughnessy Capital Management of Greenwich, Connecticut. He manages four no-load funds. A regular guest on CNN and CNBC, O’Shaughnessy is author of Invest Like the Best and How to Retire Rich.

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