What Works on Wall Street by James O'Shaughnessy Summary

Learn time-tested strategies to crush the market

What Works on Wall Street is a book written by James P. O'Shaughnessy, in which he presents the results of his research on stock market investing. The book discusses the findings of a study that analyzed the performance of various investment strategies over a long time period, including more than 50 years of stock market data.

O'Shaughnessy's research focused on identifying the factors that have historically correlated with strong stock market performance. He found that certain characteristics of a company, such as its size, value, and earnings growth, are strong predictors of future stock market returns. He also found that certain investment strategies, such as buying and holding a diversified portfolio of stocks, can lead to strong returns over time.

The book teaches readers how to use data and analysis to identify stocks that may have the potential to outperform the market. It also provides practical advice on how to implement these strategies in a real-world investment portfolio. Overall, the book is intended to help readers understand the factors that contribute to long-term stock market success and to make informed investment decisions.

This Book is Huge... Do I Read the Whole Thing?

The size alone of this book is daunting. But the good news is, most of this book just breaks down the results of the many stock screens that James O'Shaughnessy and team have run. 

Note: A stock screen is a set of parameters an investor selects

And really you can focus on the best-performing investment strategies. No one says we need to read about the below average performance screens. 

But I do recommend reading the beginning to understand O'Shaughnessy's approach to stock selection and portfolio management. 

What Are Stock Screens?

A stock screen is a tool used by investors to filter and identify stocks that meet certain criteria. Stock screens are typically used to narrow down a universe of potential investments to a more manageable list of candidates that are more likely to meet the investor's specific goals and criteria.

Stock screens can be used to filter stocks based on a wide range of criteria, including financial metrics such as price-to-earnings ratio, earnings growth, and dividend yield. Also they can use fundamental factors such as industry, market capitalization, and geographic location; and technical indicators such as moving averages and relative strength.

Investors can use stock screens to identify stocks that meet certain criteria, such as value stocks, growth stocks, dividend-paying stocks, or stocks that have a particular risk profile.

Stock screens can also be used to identify stocks that meet certain financial goals, such as generating a certain level of income or achieving a certain level of annual returns.

Stock screens can be run on financial websites or through brokerage platforms. And can be customized to fit the specific needs and preferences of the investor. They are a useful tool for investors looking to narrow down the universe of potential investments. This helps individual investors (and professionals)  find stocks that meet their specific goals and criteria.

How to Utilize These Strategies

The best stock screening tool I've found is TradingView. This is a great charting service which I pay for, but I believe the screening tool is free. And you can set up a majority of the strategies in this book using that screener. Or if you can't find some metric they use in the book, you can probably find a related measure to recreate these successful strategies on your own. 

One important factor they harp on in the book is that investors should buy all the stocks in the screen. So if the screen is to find the 25 best stocks that meet the criteria, you should be all 25. In a way this is a passive investing strategy, but it prevents us from falling into our biases. 

Many individual investors fall into the trap of undisciplined buying. They chase stocks and high stock returns. They fall victim to the sexy story stocks. And if one of us goes and buys the most interesting stock in the screen, we are likely to pick a stock that underperforms the average stock going forward. 

So before you say a strategy doesn't work, make sure you follow it to a T. 

And these time-tested investment strategies are just that... Time-tested. Some of these strategies have underperformed their benchmark for years. So don't get discouraged if the first month you try this strategy, you underperform the market. It could happen for years. But eventually, these long-term strategies will outperform again. 

He says it's not worth our time to chase tips or try to outguess others. Passive management tends to beat the market with less risk when compared to actively managed portfolios. Investing using the traditional value measure like price-to-earnings ratios will make money. But we can do better by adding measures like the price-to-book or price-to-sales ratios or higher shareholder yield will do better... And then if we add in strong price momentum, we can start making real money in stocks. 

The Cornerstone Growth Strategy

As the book goes on, we start to get to the more complex multifactor models. And one of the models he highlights is his cornerstone growth strategy. This strategy involves: 

1. Picking stocks =from the All Stocks Universe

2. A growing EPS

3. A P/S ratio < 1.5

4. Display the best 1-year performance in this All Stocks Group

This methodology makes sense. It combines traditional measures like growing EPS and combines them a price-to-sales ratio and price momentum. 

This gets us stocks that are not only cheap, but also have growing earnings and momentum.... Two qualities Wall Street looks for in an ideal value stock investment.

Personally I'd like to see cash flow metric and maybe a buyback yield incorporated in this screen, but it's not necessary. But the brilliance of this book is that we can take these screens and see if we can add to them and make them better. 

Conclusion

There are many more screens in this insightful book. These screens show you the types of stocks that do well, and those that don't, over long periods of time in the markets. 

There's no blog post long enough to cover all these strategies. So I encourage anyone looking to incorporate these quantitative strategies into their portfolios to buy the book and read it through.... And start making these screens, and improving them, on your own. 

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