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Editor's note: Today, we're continuing our weeklong series on the most powerful investing, trading, and wealth-building ideas we've encountered in the books we've read. These books have shaped the way we look at businesses and the markets. Click here to let us know what you think of the series so far.
What REALLY Works on Wall StreetBy
Tuesday, May 1, 2012
What really works on Wall Street?
James O'Shaughnessy knows...
He's not guessing. He did the math...
He got a hold of the most powerful historical stock-market databases on Earth, with data going back to 1926. And he crunched the numbers in every possible way, trying to figure out what works on Wall Street.
He published his results in his book What Works On Wall Street. The updated version of that book came out in late 2011, and it is excellent.
It covers more than 250 strategies. It's the "Bible" of stock market strategies... And it's an indispensable book in my office.
So what really does work on Wall Street?
In short, combining some valuation measure with some measure of trend...
It almost doesn't matter how you measure your trend (as long as it's up) or value (as long as it's cheap). As long as you have value and the trend, the odds are in your favor.
If you had invested $10,000 in O'Shaughnessy's specific "Trending Value" strategy in 1965, it would have turned into $48 million by 2009. Based on return versus risk taken, that was the best-performing idea out of the hundreds O'Shaughnessy tested.
Let me repeat that... $10,000 turned into $48 million.
Another strategy turned $10,000 into $298 million... going back to the 1920s. That's buying companies that return cash to shareholders (through dividends and buybacks). I wrote about that strategy here.
With O'Shaughnessy, it's just the facts. He says:
This book is not a casual read... It's not filled with entertaining stories to keep you reading. But it is full of answers...
It is full of facts... Like: Which value measure works the best in which sectors... whether small stocks are worth the risk or not... and which trending indicators work the best.
If you want to know what strategies REALLY work, you need to keep a copy of What Works on Wall Street on your desk, like I do.
I would have happily paid 10 times the cover price... Heck, I would have paid 100 times the cover price. The book is that valuable to me.
If you're serious about making money in the markets, you can buy What Works on Wall Street from Amazon for less than $25...
Good investing,
Steve
Further Reading:
You can find two more books Steve recommends here...
"Stop regarding life as an ongoing competition for social status," Alex Green writes in his book, Beyond Wealth. Steve says by reading this book, "You'll take away a few dozen ideas that will improve your own life."
How to Get Rich by Felix Dennis is "brutally honest and filled with wisdom," Steve writes. "You should read it with a highlighter in hand."
Market NotesWE HAVE A "BIG THEME" THIS WEEK! "Asia up... the West not so much."
For many years now, we've highlighted a giant idea you can label, "Asia up, the West not so much." The idea concerns the gradual increase of Asian economic power... and the gradual decrease of old European economic power. Many European countries have declining population growth and onerous business regulations. This creates a headwind against the region's stock and real estate prices. Many Asian countries have healthy population growth and are embracing free markets. This creates a tailwind behind the region's stock and real estate prices.
Over the next three days, we plan to highlight different angles to this idea. Our first installment is an updated chart of how we often display it. It's our "Singapore versus Italy" performance chart.
Singapore is a global financial hub and is considered one of the world's easiest places to do business. It also sports a low corporate tax rate. Italy is deep in debt and tough to do business in.
As you can see from today's chart, the big "Asia up, the West not so much" idea is still in play. Over the last six years, Singapore (aka EWS, the black line) and Italy (aka EWI, the blue line) have plotted very different courses. Singapore is up more than 70%. Italy is down 50%. The "Asia up, the West not so much" trend continues...
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