OShaughnessy - What Works on Wall Street

The Classic Guide to the Best-Performing Investment Strategies of All Time

JAMES P. OSHAUGHNESSY

Fourth Edition

Copyright 2012 by James P. OShaughnessy. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-175919-9
MHID: 0-07-175919-0

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To Lael, Kathryn, Patrick, and Melissa

James P. OShaughnessy is the Chairman and CEO of OShaughnessy Asset Management LLC, a quantitative asset management company located in Stamford, Connecticut. He is the author of four books on investing. Long recognized as one of Americas leading financial experts and a pioneer in quantitative equity analysis, he has been called a world beater, a statistical guru, and a legendary investor by Barrons. In February 2009, Forbes included Jim in a series on Legendary Investors along with Benjamin Graham, Warren Buffet, and Peter Lynch. OShaughnessys investment strategies have been featured widely in the media, including The Wall Street Journal, Barrons, The New York Times, The Washington Post, The Financial Times, CNN and CNBC.

Wait for the wisest of all counselors, time.

Pericles

The Chinese use two brush strokes to write the word crisis. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the dangerbut recognize the opportunity.

John F. Kennedy

This fourth edition of What Works on Wall Street has the dubious distinction of being published on the heels of the worst decade for U.S. stocks in 110 years! The first decade of 2000 began full of promise, with swarms of first-time equity buyers rushing into a market where the Nasdaq had increased nearly sevenfold (even after accounting for inflation) in the 1990s and the S&P 500 had risen nearly fourfold. As the first decade of the twenty-first century progressed, it became painfully clear that the early optimism investors had for equity returns was completely unjustified.

The decade ended with a real loss of 3.39 percent per year for the S&P 500, where $10,000 invested on December 31, 1999, was worth just $7,083 after taking the effects of inflation into account by the end of 2009. It was even worse for large-cap growth stocks as measured by the Russell 1000 Growth Index, where $10,000 invested on December 31, 1999, was cut virtually in half by December 31, 2009, declining in value to just $5,190. The Nasdaqthe darling of investors in the 1990sdid even worse, losing 7.96 percent per year, turning $10,000 invested on December 31, 1999, into just $4,364 on December 31, 2009, a peak to trough decline between February 2000 and September 2002 of 76.59 percent, very close to that of the S&P 500 during the crash of 19291932. Only small stocks had a good run during the decade, with the Russell 2000 Index eking out a gain of 0.96 percent and the Russell 2000 Value Index returning 5.60 percent a year, the only broad U.S. stock index to beat U.S. long-term bonds, which returned 5.04 percent per year.