O'Shaughnessy Method

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O'Shaughnessy Method

Postby jriley » Wed Aug 29, 2012 11:52 am

Hi all. I was just referred over to you guys here at Bogleheads by some other avid investors. I wanted to get your take on the latest (4th) edition of James O'Shaughnessy's book, "What Works on Wall Street."

For those who aren't familiar with it, JOS discusses how it's difficult or impossible to judge the efficacy of any investment mantra if the process of selection and investment cannot be clearly stated in rules that are followed explicitly for long periods of time. In short, unless you have an actuarial investment model, your returns (while potentially fantastic) are not representative of any strategy. So, what he did was build up many variants of successful published strategies and then rewind the clock to the first published stock databases. Every year he would rebalance his virtual portfolio based on the actuarial rules of the method in question and see an average yearly return along with its variance. What he came up with in the latest edition was quite remarkable. The strategy is as follows:

Group all stocks and give them a ranking in each of the following six categories:
- P/E
- P/S
- P/FCF
- P/B
- EV/EBITDA
- Shareholder Yield (dividend yield + stock buy back yield)

If a company is in the top 1% of all P/E, it gets a 99. If it's in the worst 1%, it gets a 1. The financially "perfect" company will have a 600 value.

Once all stocks have been ranked, grab the top 10% and re-order them by 6-month price momentum. Invest equally in the top 25. What you now have is a rather well distributed portfolio of 25 financially sound companies that the market is putting its money behind. You rebalance once a year and average a 21.2% yield. Additionally, it beat the market in 85% of 1-year periods, 99% of rolling 3-year periods, and 100% of rolling 5-, 7-, and 10-year periods. To top it off, it never lost money in any 5-year stretch.

Needless to say, I was intrigued. I wrote a program that goes out and farms all of the information necessary from various free websites (yahoo finance, google finance, finviz, and others) and builds a stock database locally on my machine. It executes O'Shaughnessy's method and spits out the top 25 stocks. For those interested, I ran the program on 23-August and here are the results in detailed form:

You'll notice that I broke out Shareholder Yield and Dividend so that I could see what yields were where.

Ticker Symbol: SUNH, $8.47
Sun Healthcare Group, Inc.
P/E: 9.74 P/E Rank: 88.491
P/S: 0.33 P/S Rank: 93.7098
P/B: 0.89 P/B Rank: 89.7919
P/fcf: 9.47 P/fcf Rank: 91.4448
SHYield: 0% SHYield Rank: 25.2372
Dividend: 0%
EV/EBITDA: 3.89 EV/EBITDA Rank: 95.7147
6 month price momentum: 97.9%
Overall Rank: 484.3893 Percentile: 96.633%

Ticker Symbol: DK, $25.33
Delek US Holdings Inc.
P/E: 7.43 P/E Rank: 94.0618
P/S: 0.17 P/S Rank: 97.7655
P/B: 1.95 P/B Rank: 54.2088
P/fcf: 5.03 P/fcf Rank: 97.2452
SHYield: 0.47514% SHYield Rank: 35.5984
Dividend: 0.59%
EV/EBITDA: 3.58 EV/EBITDA Rank: 96.7707
6 month price momentum: 90.45%
Overall Rank: 475.6504 Percentile: 95.7453%

Ticker Symbol: AOL, $32.79
AOL, Inc.
P/E: 3.1 P/E Rank: 99.3572
P/S: 1.42 P/S Rank: 61.5856
P/B: 0.98 P/B Rank: 85.5525
P/fcf: 9.97 P/fcf Rank: 90.4806
SHYield: 6.263% SHYield Rank: 81.2672
Dividend: 0%
EV/EBITDA: 3.78 EV/EBITDA Rank: 95.9749
6 month price momentum: 79.87%
Overall Rank: 514.2179 Percentile: 98.3777%

Ticker Symbol: WNR, $26.24
Western Refining Inc.
P/E: 19.15 P/E Rank: 56.7187
P/S: 0.25 P/S Rank: 96.1586
P/B: 2.35 P/B Rank: 45.5617
P/fcf: 4.06 P/fcf Rank: 98.0257
SHYield: 1.22% SHYield Rank: 42.0569
Dividend: 1.22%
EV/EBITDA: 2.49 EV/EBITDA Rank: 98.8675
6 month price momentum: 43.94%
Overall Rank: 437.389 Percentile: 90.0826%

Ticker Symbol: IIJI, $10.94
Internet Initiative Japan Inc.
P/E: 0 P/E Rank: 99.9694
P/S: 0.72 P/S Rank: 80.9305
P/B: 0.01 P/B Rank: 99.9694
P/fcf: 14.4 P/fcf Rank: 83.1344
SHYield: 0% SHYield Rank: 25.2372
Dividend: 0%
EV/EBITDA: 5.64 EV/EBITDA Rank: 87.3278
6 month price momentum: 42.63%
Overall Rank: 476.5687 Percentile: 95.8678%

Ticker Symbol: TSO, $38.61
Tesoro Corporation
P/E: 8.3 P/E Rank: 91.9957
P/S: 0.17 P/S Rank: 97.7655
P/B: 1.31 P/B Rank: 72.1457
P/fcf: 6.03 P/fcf Rank: 96.1279
SHYield: 3.5733% SHYield Rank: 64.0955
Dividend: 1.24%
EV/EBITDA: 3.81 EV/EBITDA Rank: 95.8678
6 month price momentum: 39.39%
Overall Rank: 517.9982 Percentile: 98.5308%

Ticker Symbol: SSI, $20.13
Stage Stores Inc.
P/E: 18.81 P/E Rank: 57.6982
P/S: 0.4 P/S Rank: 91.5672
P/B: 1.47 P/B Rank: 67.2329
P/fcf: 18.61 P/fcf Rank: 77.1044
SHYield: 16.2529% SHYield Rank: 98.3165
Dividend: 1.79%
EV/EBITDA: 5.65 EV/EBITDA Rank: 87.236
6 month price momentum: 37.88%
Overall Rank: 479.1552 Percentile: 96.0514%

Ticker Symbol: SIM, $11.08
Grupo Simec S.A.B. de C.V.
P/E: 7.8 P/E Rank: 93.1589
P/S: 0.79 P/S Rank: 78.6654
P/B: 1.02 P/B Rank: 83.1803
P/fcf: 9.62 P/fcf Rank: 91.1081
SHYield: 0% SHYield Rank: 25.2372
Dividend: 0%
EV/EBITDA: 4.1 EV/EBITDA Rank: 94.9954
6 month price momentum: 37.3%
Overall Rank: 466.3453 Percentile: 94.674%

Ticker Symbol: JAH, $48.46
Jarden Corp.
P/E: 17.56 P/E Rank: 61.9988
P/S: 0.58 P/S Rank: 85.7974
P/B: 2.38 P/B Rank: 44.7505
P/fcf: 11.98 P/fcf Rank: 87.0217
SHYield: 12.2429% SHYield Rank: 96.2351
Dividend: 0%
EV/EBITDA: 8.37 EV/EBITDA Rank: 67.7992
6 month price momentum: 37.13%
Overall Rank: 443.6027 Percentile: 91.2152%

Ticker Symbol: STC, $18.95
Stewart Information Services Corp.
P/E: 26.32 P/E Rank: 42.7762
P/S: 0.21 P/S Rank: 97.0003
P/B: 0.78 P/B Rank: 93.2813
P/fcf: 10.9 P/fcf Rank: 88.9807
SHYield: 0.23627% SHYield Rank: 33.8843
Dividend: 0.26%
EV/EBITDA: 4.2 EV/EBITDA Rank: 94.521
6 month price momentum: 36.72%
Overall Rank: 450.4438 Percentile: 92.5161%

Ticker Symbol: PCCC, $12.06
PC Connection, Inc.
P/E: 10.31 P/E Rank: 87.0217
P/S: 0.15 P/S Rank: 98.2859
P/B: 1.11 P/B Rank: 78.9868
P/fcf: 13.32 P/fcf Rank: 85.1699
SHYield: 0.96085% SHYield Rank: 39.8531
Dividend: 0%
EV/EBITDA: 4.38 EV/EBITDA Rank: 93.6027
6 month price momentum: 34%
Overall Rank: 482.9201 Percentile: 96.4493%

Ticker Symbol: PWER, $6.11
Power-One Inc.
P/E: 7.54 P/E Rank: 93.8782
P/S: 0.71 P/S Rank: 81.2213
P/B: 1.54 P/B Rank: 64.6006
P/fcf: 5.07 P/fcf Rank: 97.2146
SHYield: 0.64476% SHYield Rank: 37.1289
Dividend: 0%
EV/EBITDA: 2.89 EV/EBITDA Rank: 98.2553
6 month price momentum: 30.84%
Overall Rank: 472.2987 Percentile: 95.3168%

Ticker Symbol: CVH, $41.87
Coventry Health Care Inc.
P/E: 12.73 P/E Rank: 79.3235
P/S: 0.42 P/S Rank: 90.9703
P/B: 1.24 P/B Rank: 74.5791
P/fcf: 8.93 P/fcf Rank: 92.4549
SHYield: 9.7606% SHYield Rank: 93.0517
Dividend: 1.19%
EV/EBITDA: 5.96 EV/EBITDA Rank: 85.1852
6 month price momentum: 30.11%
Overall Rank: 515.5647 Percentile: 98.4389%

Ticker Symbol: QUAD, $16.32
Quad/Graphics, Inc.
P/E: 100000 P/E Rank: 12.5497
P/S: 0.18 P/S Rank: 97.5666
P/B: 0.59 P/B Rank: 97.1534
P/fcf: 2.97 P/fcf Rank: 98.9593
SHYield: 6.13% SHYield Rank: 80.7009
Dividend: 6.13%
EV/EBITDA: 3.54 EV/EBITDA Rank: 97.0003
6 month price momentum: 28.5%
Overall Rank: 483.9302 Percentile: 96.5412%

Ticker Symbol: CTB, $19.83
Cooper Tire & Rubber Co.
P/E: 4.16 P/E Rank: 98.7756
P/S: 0.3 P/S Rank: 94.674
P/B: 1.89 P/B Rank: 55.831
P/fcf: 9.86 P/fcf Rank: 90.7101
SHYield: 2.0869% SHYield Rank: 51.4845
Dividend: 2.12%
EV/EBITDA: 3.92 EV/EBITDA Rank: 95.5923
6 month price momentum: 28.27%
Overall Rank: 487.0676 Percentile: 96.786%

Ticker Symbol: BRP, $13.04
Brookfield Residential Properties Inc.
P/E: 1.69 P/E Rank: 99.7857
P/S: 0.13 P/S Rank: 98.7297
P/B: 1.29 P/B Rank: 72.8191
P/fcf: 2.37 P/fcf Rank: 99.296
SHYield: 0% SHYield Rank: 25.2372
Dividend: 0%
EV/EBITDA: 9.03 EV/EBITDA Rank: 62.7181
6 month price momentum: 27.1%
Overall Rank: 458.5859 Percentile: 93.7251%

Ticker Symbol: FAF, $19.12
First American Financial Corporation
P/E: 12.42 P/E Rank: 80.2571
P/S: 0.51 P/S Rank: 88.1543
P/B: 0.94 P/B Rank: 87.4043
P/fcf: 12.52 P/fcf Rank: 86.2565
SHYield: 1.6623% SHYield Rank: 46.7707
Dividend: 1.67%
EV/EBITDA: 4.21 EV/EBITDA Rank: 94.4597
6 month price momentum: 26.2%
Overall Rank: 483.3027 Percentile: 96.5106%

Ticker Symbol: SYA, $12.3
Symetra Financial Corporation
P/E: 8.04 P/E Rank: 92.7762
P/S: 0.76 P/S Rank: 79.7521
P/B: 0.5 P/B Rank: 98.0563
P/fcf: 1.62 P/fcf Rank: 99.6633
SHYield: 2.28% SHYield Rank: 53.2446
Dividend: 2.28%
EV/EBITDA: 4.4 EV/EBITDA Rank: 93.4803
6 month price momentum: 25.64%
Overall Rank: 516.9728 Percentile: 98.4695%

Ticker Symbol: DDS, $73.79
Dillard’s Inc.
P/E: 7.69 P/E Rank: 93.4803
P/S: 0.55 P/S Rank: 86.8687
P/B: 1.78 P/B Rank: 58.8766
P/fcf: 9.88 P/fcf Rank: 90.6336
SHYield: 7.6453% SHYield Rank: 87.7564
Dividend: 0.27%
EV/EBITDA: 5.85 EV/EBITDA Rank: 86.1035
6 month price momentum: 25.56%
Overall Rank: 503.719 Percentile: 97.8268%

Ticker Symbol: STX, $33.69
Seagate Technology PLC
P/E: 5.22 P/E Rank: 97.1993
P/S: 0.9 P/S Rank: 75.3597
P/B: 3.82 P/B Rank: 28.5736
P/fcf: 5.94 P/fcf Rank: 96.3116
SHYield: 19.3605% SHYield Rank: 98.9593
Dividend: 3.8%
EV/EBITDA: 3.73 EV/EBITDA Rank: 96.2963
6 month price momentum: 24.82%
Overall Rank: 492.6997 Percentile: 97.0921%

Ticker Symbol: CSGS, $20.27
CSG International, Inc.
P/E: 14.58 P/E Rank: 72.1304
P/S: 0.92 P/S Rank: 74.8393
P/B: 2.36 P/B Rank: 45.2709
P/fcf: 5.96 P/fcf Rank: 96.2198
SHYield: 3.2387% SHYield Rank: 61.1264
Dividend: 0%
EV/EBITDA: 4.55 EV/EBITDA Rank: 92.8528
6 month price momentum: 24.74%
Overall Rank: 442.4395 Percentile: 90.8785%

Ticker Symbol: JNY, $11.8
The Jones Group Inc.
P/E: 36.88 P/E Rank: 35.8127
P/S: 0.25 P/S Rank: 96.1586
P/B: 0.88 P/B Rank: 90.2357
P/fcf: 4.17 P/fcf Rank: 97.9186
SHYield: 4.7513% SHYield Rank: 72.6967
Dividend: 1.69%
EV/EBITDA: 6.26 EV/EBITDA Rank: 83.4405
6 month price momentum: 24.47%
Overall Rank: 476.2626 Percentile: 95.8372%

Ticker Symbol: CENT, $10.97
Central Garden & Pet Co.
P/E: 24.93 P/E Rank: 44.4597
P/S: 0.32 P/S Rank: 94.0006
P/B: 1.14 P/B Rank: 77.9308
P/fcf: 6.8 P/fcf Rank: 95.1485
SHYield: 8.8024% SHYield Rank: 91.2458
Dividend: 0%
EV/EBITDA: 8.47 EV/EBITDA Rank: 66.9268
6 month price momentum: 22.98%
Overall Rank: 469.7123 Percentile: 95.0719%

Ticker Symbol: SEM, $10.29
Select Medical Holdings Corporation
P/E: 10.19 P/E Rank: 87.2513
P/S: 0.5 P/S Rank: 88.4298
P/B: 1.67 P/B Rank: 61.2182
P/fcf: 7.12 P/fcf Rank: 94.8271
SHYield: 3.4277% SHYield Rank: 62.9017
Dividend: 0%
EV/EBITDA: 7.07 EV/EBITDA Rank: 77.7319
6 month price momentum: 22.65%
Overall Rank: 472.36 Percentile: 95.3474%

Ticker Symbol: ALL, $37.71
The Allstate Corporation
P/E: 9.13 P/E Rank: 90.052
P/S: 0.57 P/S Rank: 86.1647
P/B: 0.94 P/B Rank: 87.4043
P/fcf: 10.71 P/fcf Rank: 89.3633
SHYield: 7.4604% SHYield Rank: 87.236
Dividend: 2.33%
EV/EBITDA: 5.98 EV/EBITDA Rank: 85.0015
6 month price momentum: 21.88%
Overall Rank: 525.2219 Percentile: 98.8981%

I had earlier run the program back on May 22 and then July 18th to build some virtual portfolios. The May 22nd portfolio is currently sitting at +16.6% in three months and the July 18th is resting at +7.6% after one month. Obviously, these are small sample sizes, but I haven't found implementation of O'Shaughnessy's work elsewhere, so I thought I'd share.

Thoughts?

-Justin
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Re: O'Shaughnessy Method

Postby livesoft » Wed Aug 29, 2012 6:03 pm

You should post this to a more receptive audience. I suggest you do so here: http://www.early-retirement.org/forums/f44/

Also when you say something is up XX% in YY months, without giving a benchmark, then it is meaningless to me. Suppose Vanguard Large-Cap index was up 50% in the time period that you remarked about. Wouldn't that mean that your results are pretty bad?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: O'Shaughnessy Method

Postby nisiprius » Wed Aug 29, 2012 6:21 pm

jriley wrote:For those who aren't familiar with it, JOS discusses how it's difficult or impossible to judge the efficacy of any investment mantra if the process of selection and investment cannot be clearly stated in rules that are followed explicitly for long periods of time. In short, unless you have an actuarial investment model, your returns (while potentially fantastic) are not representative of any strategy.
So far, so good.
So, what he did was build up many variants of successful published strategies and then rewind the clock to the first published stock databases.
Oops. Blew it.

That's the rub. It's the problem with almost all backtesting. It's only statistically valid if you do it once. If you do it over and over again with many strategies, it means nothing.

If you test strategy after strategy after strategy, sooner or later you will come across one that seems to work even though it's by chance alone. If you test 1,000 strategies, then show someone the best, they'll judge "wow, there's only one chance in a thousand you could get that just by luck." It's worse if you start out with "successful" published strategies, because these are all ones that are known to have worked in the past. And of course it's hopeless if you do what just about everyone does: try something--pick stocks that have a florble-to-gnorgl ratio of 3.62 or better, notice that twenty of them outperformed but the other two were such stinkers that they lost more than the other 20 gained, notice that the two stinkers both had more than one vowel in their ticker symbols, and create a revised rule: stocks with a florble-to-gnorgl ratio of 3.62 AND no more than one vowel in their symbol.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: O'Shaughnessy Method

Postby stlutz » Wed Aug 29, 2012 7:14 pm

This is just another version of the "microcap deep value with a little momentum thrown in for good measure" approach that has been discussed on this forum dozens or even hundreds of times. Do a search on "value premium" to find more thoughts on the issue.
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Re: O'Shaughnessy Method

Postby staythecourse » Wed Aug 29, 2012 8:31 pm

OP,

Kudos for your friend to refer you here. Many of us have our biases (like anywhere else), but you will not get more informative, level headed advice anywhere else.

To your question... I don't have the answer nor do I care. You will find the more you learn about investing the more it has NOTHING to do with what folks write about in books. One thing I can say is look how easy it was for you to get all that information so you gotta figure how many folks have already tried this method with the same data and none have come out ahead of the others. The author of the book is the same man who wrote extensively about the Dogs of the Dow and that never panned out for any investor I know. The Motley Fool folks found that out the hard way. What makes one think this new method (if it is much different) will do any better??

If you are interested in investing I would focus on these 5 points that are about as much as you need to know to be a succesful investor.

1. Save as much as you can so you can invest as much as you can.
2. Asset Allocation is king and should be based on one's willingness, ability, and need to take risk.
3. Avoid active management as it is a loser's game.
4. Realize costs, taxes, and inflation eat into long term returns.
5. STAY THE COURSE so you don't mess everything up.

As you will notice there is no mention of one valuation metric and that is the ironic part of succesful investing. You can be a GREAT investor without needing to know anything about stock valuations.

If you are interested in learning what counts in investing I would suggest start reading a couple simple books, either Allen Roth's "How a Second Grader Beat Wall Street" or Jack Bogle's edition to the Little Book series on index funds.

Good luck.
...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle
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Re: O'Shaughnessy Method

Postby midareff » Wed Aug 29, 2012 8:43 pm

Don't be offended and you obviously did a significant amount of work to get to the data you posted. As a group we are not interested in what stocks are the flavor of the month, or what latest super strategy produced XYZ results when back tested to 1491. As noted in prior posts we believe in saving as much as you can, asset allocation, owning whole markets, rebalancing, staying the course and avoiding active trading and other costs which reduce overall returns, among others as a brief list. There is much information on this site. Might be worth your time to delve into it, especially the suggested reading material lists.
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Re: O'Shaughnessy Method

Postby alec » Wed Aug 29, 2012 8:50 pm

Around 2000 or 2001 bill bernstein wrote an article over at morning star about how WWOWS was all data mining. Im sure if you google it you'll find it.
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Re: O'Shaughnessy Method

Postby jriley » Thu Aug 30, 2012 9:23 am

nisiprius wrote:That's the rub. It's the problem with almost all backtesting. It's only statistically valid if you do it once. If you do it over and over again with many strategies, it means nothing.

If you test strategy after strategy after strategy, sooner or later you will come across one that seems to work even though it's by chance alone. If you test 1,000 strategies, then show someone the best, they'll judge "wow, there's only one chance in a thousand you could get that just by luck." It's worse if you start out with "successful" published strategies, because these are all ones that are known to have worked in the past. And of course it's hopeless if you do what just about everyone does: try something--pick stocks that have a florble-to-gnorgl ratio of 3.62 or better, notice that twenty of them outperformed but the other two were such stinkers that they lost more than the other 20 gained, notice that the two stinkers both had more than one vowel in their ticker symbols, and create a revised rule: stocks with a florble-to-gnorgl ratio of 3.62 AND no more than one vowel in their symbol.


Well put, and I definitely concur with the sentiment. It all goes back to the addage, "statistics don't lie, but statisticians do." I'd say that this specific strategy does fall under the florble-to-gnorgl ratio issue, although if you have a baseline strategy that is at-or-above market performance and then add in your florble metrics, you're still essentially executing the baseline strategy through rose colored glasses. I will contend that a strategy which is constantly tweaked many times over the same set of data actually does mean something, however. Go back to the Deep Blue experiment of 1996. It had a database of games and a logic based strategy method that it executed to try to beat those games. Many iterations were attempted, but the end result was still the first ever world chess champion beating computer. Perhaps it's not applicable to this situation, but be careful in the generalization of the approach.

staythecourse wrote:Kudos for your friend to refer you here. Many of us have our biases (like anywhere else), but you will not get more informative, level headed advice anywhere else.

To your question... I don't have the answer nor do I care. You will find the more you learn about investing the more it has NOTHING to do with what folks write about in books. One thing I can say is look how easy it was for you to get all that information so you gotta figure how many folks have already tried this method with the same data and none have come out ahead of the others. The author of the book is the same man who wrote extensively about the Dogs of the Dow and that never panned out for any investor I know. The Motley Fool folks found that out the hard way. What makes one think this new method (if it is much different) will do any better??

If you are interested in investing I would focus on these 5 points that are about as much as you need to know to be a succesful investor.

1. Save as much as you can so you can invest as much as you can.
2. Asset Allocation is king and should be based on one's willingness, ability, and need to take risk.
3. Avoid active management as it is a loser's game.
4. Realize costs, taxes, and inflation eat into long term returns.
5. STAY THE COURSE so you don't mess everything up.

As you will notice there is no mention of one valuation metric and that is the ironic part of succesful investing. You can be a GREAT investor without needing to know anything about stock valuations.

If you are interested in learning what counts in investing I would suggest start reading a couple simple books, either Allen Roth's "How a Second Grader Beat Wall Street" or Jack Bogle's edition to the Little Book series on index funds.


Thanks! I was told exactly this when being referred here. Level-headed, honest feedback. Presenting a contrarian approach is rarely received well in many forums that (as you mentioned) have their biases, but the quality of the feedback is really dependent on the members' ability to think clearly while writing out their responses. I appreciate that effort.

I'm pretty much on board with all of the 5 items you listed already, so I'm off to a good start! Maxed out employer match, maxed out ROTH IRA, and continue to save additional free funds monthly. Never keep more than is needed to be liquid in my bank accounts and the rest is invested in the market.

Asset Allocation is something that I'll need to work on. I have a significantly higher tolerance for risk than the average person, but its within my comfort zone and I don't lose sleep over it, so I'm not concerned there. Right now I'm divided up 8% healthcare, 28% financial industries, 16% consumer goods, 4% technology, 24% services, and 20% basic materials. Yes, it all in equities, but there is still some diversification.

The "active trading" part is interesting based on how you define it. Depending on your portfolio size, the fees associated with owning whole markets can exceed that of someone who executes, say, 100 trades in a year. This strategy employs 50 trades a year (25 buys, 25 sells), but that will total up to $400 or less on most online brokerages. For a $100k account, that's a 0.4% fee which may be comparable or even less to many funds. Obviously our goal is to keep as much of the profit in our pockets as possible, so this line will blur and eventually fall onto the side of the trader as account size increases. If you had a $10M account, for example, and could earn an 8% return through buying and selling 100 times per year or match the market's 8% return for a .15% fee, you'd be lighting over $14,000 on fire each year through the later method.

midareff wrote:Don't be offended and you obviously did a significant amount of work to get to the data you posted. As a group we are not interested in what stocks are the flavor of the month, or what latest super strategy produced XYZ results when back tested to 1491. As noted in prior posts we believe in saving as much as you can, asset allocation, owning whole markets, rebalancing, staying the course and avoiding active trading and other costs which reduce overall returns, among others as a brief list. There is much information on this site. Might be worth your time to delve into it, especially the suggested reading material lists.


Thanks! I certainly will. You guys seem like an intelligent bunch (though I sense at least a bit of group think, but that's to be expected from any forum given a long enough time frame), so I'll certainly stick around and learn and evaluate other methods!

-Justin
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Re: O'Shaughnessy Method

Postby Rick Ferri » Thu Aug 30, 2012 10:16 am

I've been a fan of Jim O'Shaughnessy for years and have read his 4th edition of "What Works on Wall Street" in its entirety. It's wonderful information, IMO. Many people in the investment industry and most people in academics don't give O'Shaughnessy enough credit for his work. He is an asset manager who competes against large firms, so his work doesn’t get mentioned, and he’s not a Ph.D., so academics dismiss his data as incomplete.

O'Shaughnessy also fell on hard times. He launched is first deep-value fund in the mid-1990s, right before the biggest surge in growth stocks that the US market had seen in a decades. Needless to say, he and his company fund fell into obscurity. The fund was eventually closed, and O'Shaughnessy changed jobs a few times.

Basically, O'Shaughnessy is a value stock manager with an eye toward momentum. But what he calls value is different than what DFA, S&P, MSCI and other index/fund providers call value. That’s fine. The difference in style methodologies is easy to show when it comes to firm size and momentum, but more difficult when it comes to growth and value. Size and momentum is simply dividing broad market indexes by using a fixed number or rank. It's very straightforward. Value is different. There are a million ways to divide companies into value and growth buckets. What DFA calls value is different than what S&P, MSCI, Russell, Wilshire and O'Shaughnessy. As I’ve always said, Value is in the eye of the beholder.

My critical comment about O'Shaughnessy's method is that he equal weights his data rather than using market weight. He also focuses too much on top 100 stocks in each screen, which I believe is too few securities. These minor issues do not take away from the message.

What Works on Wall Street, 4th edition is a great read for people who enjoy digging deep into data. The introduction alone is worth the price of the book.

Rick Ferri
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Re: O'Shaughnessy Method

Postby Jerilynn » Thu Aug 30, 2012 11:43 am

Rick Ferri wrote:What Works on Wall Street, 4th edition is a great read for people who enjoy digging deep into data. The introduction alone is worth the price of the book.

Rick Ferri


That must be the mother of all introductions for $26.64.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: O'Shaughnessy Method

Postby Rick Ferri » Thu Aug 30, 2012 1:12 pm

We'll, I thought so, but I'm a sucker for this stuff.
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Re: O'Shaughnessy Method

Postby pkcrafter » Thu Aug 30, 2012 1:42 pm

jriley, you have been given an endorsement, sort of, from Rick Ferri. Click on Rick's name and then review some of his past posts. Rick is also principal of Portfolio Solutions and author of several books.

I hope you can hang around awhile and see what we are all about. Be sure to explore the Wiki too.

http://www.bogleheads.org/wiki/Main_Page

And to provide you with a broad perspective different than O'Shaughnessy, I'll suggest William Bernstein's The Four Pillars of Investing.


Paul
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Re: O'Shaughnessy Method

Postby Easy Rhino » Thu Aug 30, 2012 5:34 pm

For JOS, is a high P/E ratio "good" or "bad" in terms of getting a score?
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Re: O'Shaughnessy Method

Postby interplanetjanet » Thu Aug 30, 2012 6:44 pm

jriley wrote:I'm pretty much on board with all of the 5 items you listed already, so I'm off to a good start! Maxed out employer match, maxed out ROTH IRA, and continue to save additional free funds monthly. Never keep more than is needed to be liquid in my bank accounts and the rest is invested in the market.

Unless either your employer options are truly dreadful or you are saving money for preretirement needs, you may want to put more into your employers' 401k or 403b and avoid taxable investing. Plans such as 401k's avoid capital gains tax entirely, which is a large benefit - add to that the probability that you will be in a lower tax rate during retirement and they become an even better deal.

The considerable majority of us here (last I checked) max out 401k or 403b (or TSP) plans - there's are good reasons for this. In a high tax bracket I would even do so before putting money towards a Roth IRA, if the options in the employer plan are good.

-janet
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Re: O'Shaughnessy Method

Postby wilpat » Thu Aug 30, 2012 7:42 pm

"O'Shaughnessy's Law" ----- O'Shaughnessy thought Murphy was an optimist!
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Re: O'Shaughnessy Method

Postby DenisD » Fri Aug 31, 2012 12:06 am

I've been running O'Shaughnessy-type screens based on previous editions of the book for several years. Each screen contains 20 companies. The companies in the large-cap screens are "Market Leaders" with the highest shareholder yield. The companies in the small-cap screen are "Reasonable Runaways".

Here are 5 year returns to the end of 2011 for my screens and some ETFs. All returns are in Canadian dollars.

Code: Select all
Name                          Symbol     2011
iShares CDN LargeCap 60 Index XIU         0.7
DenisD Canadian Large Value               3.6
Vanguard Large Cap            VV         -2.5
DenisD US Large Value                     0.2
Vanguard Mid Cap              VO         -1.4
Vanguard Small Cap            VB         -0.9
DenisD US Small Value                    -6.4
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Re: O'Shaughnessy Method

Postby jriley » Fri Aug 31, 2012 9:12 am

pkcrafter wrote:jriley, you have been given an endorsement, sort of, from Rick Ferri. Click on Rick's name and then review some of his past posts. Rick is also principal of Portfolio Solutions and author of several books.

I hope you can hang around awhile and see what we are all about. Be sure to explore the Wiki too.

http://www.bogleheads.org/wiki/Main_Page

And to provide you with a broad perspective different than O'Shaughnessy, I'll suggest William Bernstein's The Four Pillars of Investing.


Paul


I certainly will! I like to keep an open mind to all methods and evaluate each on its own merits. While I may not agree with some, there's logic behind them all. Figuring out what caused someone to choose that path of logic is what has always intrigued me. Perhaps that's why I'm an engineer! I just ordered Bernstein's book. Should be here tomorrow. Amazon Prime is a dangerous thing.

I've read some of Rick's posts and they're quite well written as well as informative. The responses made me believe that he's a long time and well respected member of this board. I'll read some more of his threads and then make up my mind on Mr. Ferri!

Easy Rhino wrote:For JOS, is a high P/E ratio "good" or "bad" in terms of getting a score?


High P/E is bad. You want to be paying as little for each dollar of earnings as possible. For each of the metrics, I'll give a (low) or (high) to indicate which is the 100, which is the 1.

P/E (low)
P/S (low)
P/B (low)
P/FCF (low)
Shareholder Yield (High)
EV/EBITDA (low)

Of course, some people look at EBITDA/EV, so then you'd be after the High metric. That may actually be less code intensive, as then you avoid the potential singularity when earnings are exactly zero. Enterprise Value should never be zero!

interplanetjanet wrote:Unless either your employer options are truly dreadful or you are saving money for preretirement needs, you may want to put more into your employers' 401k or 403b and avoid taxable investing. Plans such as 401k's avoid capital gains tax entirely, which is a large benefit - add to that the probability that you will be in a lower tax rate during retirement and they become an even better deal.

The considerable majority of us here (last I checked) max out 401k or 403b (or TSP) plans - there's are good reasons for this. In a high tax bracket I would even do so before putting money towards a Roth IRA, if the options in the employer plan are good.

-janet


Janet, thanks for the reply! I'm actually within the government, so I'm a TSP guy. I've read up on many of the posts in here regarding the various TSP funds and building a "correct" AA based on the combination of the TSP, your ROTH, and individual investment methods. Currently, I'm at 12% in TSP which is obviously shy of the 17% max, but plenty to get the full match. I had made a conscious decision to max out my ROTH contributions prior to bumping my TSP to max as I've started side businesses and have additional revenue streams. Once my income reaches a critical level, I will be unable to contribute to the ROTH, but may still contribute to the TSP. I'll have to build up some simulations with varying returns to see which is more profitable in the long term, but this wasn't a blind decision by any means.

Edit: I should also note that I do contribute to my individual investment accounts for pre-retirement needs. All of my models, assuming even modest rates of return, have my retirement plan well on track to provide me with nothing short of a comfortable experience. While the tax benefits of contributing more than I am would obviously be well received, they wouldn't turn the tables from "scraping by" to "living luxuriously." I've got to enjoy my time up until then, too!

-Justin
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Re: O'Shaughnessy Method

Postby jriley » Fri Aug 31, 2012 9:21 am

DenisD wrote:I've been running O'Shaughnessy-type screens based on previous editions of the book for several years. Each screen contains 20 companies. The companies in the large-cap screens are "Market Leaders" with the highest shareholder yield. The companies in the small-cap screen are "Reasonable Runaways".

Here are 5 year returns to the end of 2011 for my screens and some ETFs. All returns are in Canadian dollars.

Code: Select all
Name                          Symbol     2011
iShares CDN LargeCap 60 Index XIU         0.7
DenisD Canadian Large Value               3.6
Vanguard Large Cap            VV         -2.5
DenisD US Large Value                     0.2
Vanguard Mid Cap              VO         -1.4
Vanguard Small Cap            VB         -0.9
DenisD US Small Value                    -6.4


Denis, very interesting work! I'd love to chat more about this, especially as I'm not that well versed in JOS's older published strategies. Sending you a PM!
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Re: O'Shaughnessy Method

Postby Default User BR » Fri Aug 31, 2012 11:06 am

jriley wrote:Once my income reaches a critical level, I will be unable to contribute to the ROTH

Depending on circumstances, this might never be the case. Unless you have existing IRAs with taxable money in them, you would be able to do backdoor Roth even after your income exceeds the limit for direct contribution.

Check the Wiki or search the forum for more details.


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Re: O'Shaughnessy Method

Postby bigDanShan » Fri Aug 31, 2012 3:16 pm

First couple of chapters available here on googleview
http://www.mcgraw-hill.com.au/html/9780071625760.html

1st chapter is strongly positive towards passive index investing. "Since 1991 70% of actively managed funds failed to beat the S+P 500 over previous 10 yr period. "

Intro available for download here but link appears to be brokern
http://www.mhprofessional.com/product.php?isbn=0071625763
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Re: O'Shaughnessy Method

Postby DenisD » Sat Sep 01, 2012 12:41 am

jriley wrote: I'd love to chat more about this, especially as I'm not that well versed in JOS's older published strategies.
I don't actually own any of O'Shaughnessy's books. :shock: I borrow them from the library. So, the following information about older strategies is from memory and may contain errors.

The definition of Market Leaders was in the first edition and hasn't changed in the current edition. In the first edition, the large-cap value strategy picked nonutility Market Leaders with the highest dividend yield. In a subsequent edition, he changed dividend yield to shareholder yield. The current edition, adds a momentum parameter but doesn't improve returns much.

Reasonable Runaways was the name for the all-cap growth strategy. From companies with price/sales less than 1.5 and year over year earnings increase, it picks those with the highest one year price increase. In a subsequent edition, he added the requirement that 3 and 6 month price increases must be greater than the median. The current edition mentions this strategy briefly. Maybe at the start of the growth chapter. I don't think it's been doing very well in the last few years. :wink:
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