Stock market tips from 'What Works on Wall Street' author James P. O'Shaughnessy

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

What’s the secret of success in the stock market?

James P. O’Shaughnessy, author of “What Works on Wall Street” (fourth edition, 2012 [sic]), offers an answer – and I think he’s right.

Choose a reasonable investment strategy, he counsels – and stick with it.

The strategy could even be investing an index fund.

Just don’t give up and abandon your strategy, changing horses in mid-stream. Like right now, when pessimism is rife. This is, in fact, O’Shaughnessy believes, a fine time to invest in stocks. Talk about low returns for stocks being “the new normal,” he believes, is nonsense. People are always mistakenly projecting that short-term returns will endure.

Investors, he writes, “seem to be programmed by nature to fail at investing, forever chasing the asset class that has turned in the best performance recently and heavily discounting anything that occurred more than three to five years ago.”

He himself has found that “investors who diligently stuck with the best long-term strategies did significantly better than those who followed a hit and miss approach to investing. Indeed, the wholesale shift to bonds and other asset classes that has occurred over the last several years looks to be yet another bubble.”

A former senior managing director for Bear Stearns, he boldly predicts that stocks will be the best-performing asset over the next 10 and 20 years.

O’Shaughnessy is a numbers man, a quant, and what he’s done is look at which investment strategies have actually done well over the years.

He’s a sensible guy, endorsing index funds and dismissing nonsensical talk of an “efficient market” (stocks are always reasonably valued) and “a random walk” (the market is never predictable).

But I do have a complaint. O’Shaughnessy doesn’t extol the virtues of diversification enough – owning a variety of stocks, for instance. He doesn’t even extol low costs. (Hasn’t he read John Bogle?) Neither “diversification” nor “cost” is even listed in the index.

Apart from these unfortunate lacunae, O’Shaughnessy’s book is a gem. Enlightening, clear as a bell, and fun to read. The book costs $45, it’s published by McGraw-Hill, and has 681 large pages. You can get it for $22 from Amazon.com.

Here are some of his conclusions:

One of the worst things you can do: Buy “Wall Street’s current darlings with the richest valuations.”

The poorest-performing sector is also one of the most popular: information technologies.

The two least-risky sectors are consumer staples and utilities. Yet you can get market-beating returns by focusing on various value attributes and yield.

Certain markers are clearly and consistently rewarded: stocks with low price-to-earnings ratios, low price-to-cash flow ratios, and price-to-sales ratios. Certain markers are clearly and consistently punished: stocks with high price-to-earnings, price to cash flow, and price to sales ratios.

All strategies at times will underperform and over-perform their appropriate benchmarks.

Ignoring short-term results may be the hardest thing you can do for your portfolio. And the best.

Rebalance your allocations to various styles and asset classes at least once a year. (I would say: Do it whenever your portfolio has become markedly different from your target allocation.)

Always have some value stocks (cheap but good) and growth stocks (not cheap but good) in your portfolio.

Before investing in any stock, make sure that it passes several hurdles, not just one.

To receive Warren Boroson’s column regularly, drop him a note at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .