Stock Selection: O'Shaughnessy's Best, 12/51-12/94

O'Shaughnessy Summary
12/51 - 12/94
rr std 10k -> (mils)
S&P500 11.4% 16.6% 1.028

Strategies: q Jan b 50 stocks w/:
Large = cap>mean All = cap>$150 mil*
rr std 10k-> rr std 10k->
11.4 16.2 1.043 12.8 19.9 1.782 mil
Lowest PE 13.5% 21.7 2.287 11.8% 25.4 1.231 mil
Highest PE 9.4 20.5 .467 8.9 26.6 .386 mil
Lowest P/Book 14.5 20.3 3.418 14.7 25.9 3.591 mil
Hiest P/Book 9.8 23.2 .563 8.1 28.7 .286
Lo P/Cash Flo 14.7 20.9 3.618 14.1 26.3 2.947
Hi P/Cash Flo 9.8 22.2 .547 7.3 27.2 .207
Lo P/Sales 13.8 20.9 2.545 16.0 26.1 5.932
Hi Div Yld 13.1 17.9 2.013 11.6 21.7 1.112
Hi EPS %ch yr 9.1 19.7 .393 11.3 27.5 .912
Lo EPS %ch yr 11.9 18.7 1.124 11.9 24.1 1.133
Hi EPS %ch 5yr 9.5 21.7 .372 9.3 27.1 .353
Hi Profit Marg 10.6 16.1 .749 10.5 20.9 .741
Hi ROE 10.7 19.8 .793 12.7 26.7 1.714
Hi Rel Str 1 yr 14.2 22.5 2.988 14.5 30.1 3.310
Lo Rel Str 1 yr 9.5 20.9 .485 2.5 26.8 .029
Hi RS + PSR <> 15 17.3 27.6 9.356
Mkt Ldrs: lrge, float>avg, P/cash flo1.5:
Hiest div 15.0 17.3 4.141

Gro: 5yEPS%ch>avg, Prof Marg>avg, up earngs q y x5:
Hiest RS 16.1% 22.7 3.942
PSR < large =" cap">mean All = cap>$150 mil*
rr std 10k-> rr std 10k->
11.4 16.2 1.043 12.8 19.9 1.782 mil
Hi RS + PSR <>avg, Prof Marg>avg, up earngs q y x5:
+PSR <> 15 17.3 27.6 9.356
Gro: 5yEPS%ch>avg, Prof Marg>avg, up earngs q y x5:
PSR <>avg, P/cash flo1.5:
Hiest div 15.0 17.3 4.141

Here's a summary of James P. O'Shaughnessy's research from What Works on Wall Street

- avoid anecdotal evidence; anything can seem true once or even several times; we have an inborn weakness to overweight recent events and draw correlations or causations based on a story or personal experience (the auther cites several fascinating studies to illustrate this and gives the abysmal longterm track record of professional money managers, analysts, and other "experts").

- study correlations for long periods of times; a few years (even 10) is not enough. What works in one time period may fail in another, but some relationships have held up for at least half a century (see below).

- try to stick to quantifiable, predefined rules or guidelines rather than subjective, human-based opinions, either your own or the "experts'" when making investment decisions;

- nothing works all the time; expect ANY approach to investing to have periods of relative underperformance, sometimes lasting several years; this does not mean you are "wrong," simply that you are in a historically atypical period.

- the best systems combine measures of value (low stock price) and growth (high momentum); the best stock is a fast-rising one that is still relatively cheap.

Methods: O'Shaughnessy was the first person to access the ENTIRE database of all U.S. stocks traded (via the Compustat database) and test how you would have done if you had applied some simple rules from 1950 to the present every year. He only used data you would have known at the time (he even penalizes himself in some cases) and only allows himself to make buy or sell decisions once a year (he has to hold on to losers you or I might dump earlier). He tried to remove all subjectivity from the process by coming up with quantifiable, if-then sorts of rules.

Analysis: He then subjected his results to intense mathematical and statistical analysis (all of which is given in tabular and graphic form) in an attempt to answer the following questions:

- are my observations consistent over the study period or are my final results due to some bizarre one or two year period?

- what is the RISK of each approach (as measured by standard deviation of annual returns and the Sharpe ratio, which is a measure of total return compared to risk-free return (Treasury bills) divided by the standard deviation?

- how often did this approach beat "the market" and by how much? How many 1 year, 5 year, and 10 year periods did it beat the market? What would my biggest loss have been? My greatest gain?

Results:

Results from O'Shaughnessy's "What Works on Wall Street"
12/31/1951-12/31/1994
	Annual Rate of Return:
		Standard	$10,000
	Average:	Deviation:	becomes:
S&P500:	11.38%	16.56%	1,027,827
Large Stocks (cap > mean)	11.41%	16.18%	1,042,858
All Stocks*	12.81%	19.86%	1,782,175
Large Stock studies:
Large Stocks:	11.41%	16.18%	1,042,858
50 Lowest PE each year:	13.47%	21.70%	2,287,003
50 Highest PE each year:	9.35%	20.51%	467,012
50 Lowest Price/Book each year:	14.53%	20.34%	3,417,758
50 Highest Price/Book each year:	9.83%	23.16%	562,992
50 Lowest Price/Cash Flow each year:	14.68%	20.91%	3,618,123
50 Highest Price/Cash Flow each year:	9.75%	22.15%	546,816
50 Lowest Price/Sales each year:	13.75%	20.91%	2,545,234
50 Highest Price/Sales each year:	9.06%	20.74%	416,189
50 Highest Dividend Yield each year:	13.13%	17.88%	2,012,843
50 Highest EPS Annual % Change:	9.13%	19.68%	392,549
50 Lowest EPS Annual % Change:	11.90%	18.68%	1,124,209
50 Highest EPS 5 Year % Change:	9.46%	21.73%	371,937
50 Highest Profit Margin:	10.56%	16.07%	748,843
50 Highest Return on Equity:	10.70%	19.82%	792,560
Relative Strength, Highest:	14.17%	22.46%	2,987,646
Relative Strength, Lowest:	9.45%	20.88%	485,417
Highest Relative Strength AND PSR <>	14.64%	19.19%	3,566,132
Market Leaders:	= Large AND Float > Average AND Cashflow/Share > Average
	AND Sales/Average > 1.5
50 Highest Dividend Yield	15.04%	17.25%	4,141,129
All Stocks Studies:
All Stocks*	12.81%	19.86%	1,782,175
50 Lowest PE each year:	14.66%	25.41%	1,230,991
50 Highest PE each year:	8.87%	26.63%	385,890
50 Lowest Price/Book each year:	14.66%	25.89%	3,591,446
50 Highest Price/Book each year:	8.11%	28.65%	286,347
50 Lowest Price/Cash Flow each year:	14.14%	26.25%	2,947,183
50 Highest Price/Cash Flow each year:	7.30%	27.19%	206,805
50 Lowest Price/Sales each year:	16.01%	26.08%	5,932,737
50 Highest Price/Sales each year:	4.72%	26.95%	72,552
50 Highest Dividend Yield each year:	11.58%	21.70%	1,112,060
50 Highest EPS Annual % Change:	11.34%	27.52%	911,615
50 Lowest EPS Annual % Change:	11.92%	24.13%	1,132,754
50 Highest EPS 5 Year % Change:	9.32%	27.07%	353,448
50 Highest Profit Margin:	10.53%	20.86%	740,552
50 Highest Return on Equity:	12.71%	26.71%	1,713,965
Relative Strength, Highest:	14.45%	30.14%	3,310,255
Relative Strength, Lowest:	2.54%	26.83%	29,351
Highest Relative Strength AND PE <>	17.60%	24.25%	10,645,437
Highest Relative Strength AND PSR <>	18.38%	26.04%	14,141,980
Highest Relative Strength AND ROE > 15:	17.25%	27.60%	9,355,638
Cornerstone Growth:	5 Year EPS % ch > average AND Profit Margin > average AND
	Earnings gain 5 years in a row
50 Highest Relative Strength:	16.12%	22.71%	3,942,460
PSR <>
Highest RS:	16.86%	28.69%	5,091,746
PSR <>
Highest RS:	18.14%	26.22%	7,858,269
* market capitalization > deflated $150 million