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Hi Dan,
O'Shaughnessy's book is a good example of how a little knowledge can
sometimes be more harmful than helpful to the individual investor. The
results of
this study had been circulated among institutionals, its true audience, a
few years prior to its release to the general public. One of the key points
he makes but many readers tend to gloss over is the number of stocks to be
held. Less than 5% of all private investment accounts have sufficient
assets to hold 50 stocks in any meaningful quantity. Without the
diversification provided by holding a large number of issues, the portfolio
returns become erratic and the choice of strategy becomes no better than
random chance and in some cases more dangerous. This is something he has
repeatedly emphasized in interviews since the book was published. Even if
your account is large enough to do it, actively trading more than a handful
of positions properly is almost impossible for any one person. No, these
results were meant for institutional clients staffed large enough to handle
"back office" duties a portfolio of this size would require.
I think if anything useful can be taken from his work you have to look past
his statistical forest. First,deciding on an comprehensive investment
strategy based on fundamentals, TA,or whatever, and *sticking to it* over
the long hall through thick and thin is
the key to success. The second important thing is that it is wise to employ
different methods for choosing large cap and small cap issues. The last
thing is that if his theory is correct, then it supports the methods of a
couple of other Irish lads, Mike O'Higgins, of Dow Dogs fame and Bill
O'Neil, founder of the CANSLIM.
You might also want to reconsider by your desire for volatility as a
"speculator" too, unless you are selling options perhaps, as this is really
the "gamblers" mantra. The last thing you want is volatility in trading
system returns. Ideally you want to see the equity curve plot for your
trading system follow a nice smooth upward slope. Perhaps you confuse
volatility in return with the daily true range of prices for your tradable.
But even large values of range are not really desirable because it indicates
the security in most cases is no longer trending. Most of us are not nimble
enough to trade non-trending stocks profitably and consistently. In
addition, when stocks become "wide & loose," as characterized by daily
higher highs and lower lows, they are virtually impossible to trade with ANY
system and represent only punts. For stocks that are in strong trends and
with large values of range like the internet stocks this summer, stops have
to placed so far out that in most cases any well designed money management
rule would keep you out of the trade anyway. Even if you could take the
trade, prices are generally moving so fast the slippage will eat you alive.
Just some food for thought.
regards,
Rick,
Tokyo, Japan
-----Original Message-----useful
From: HARELSDB@xxxxxxx <HARELSDB@xxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Sunday, August 02, 1998 5:06 PM
Subject: Re: O'Shaughnessy
>In his book "What works on Wall Street", O'Shaughnessy found that by
investing
>in the 50 stocks in his universe with highest 1 year relative strength, he
>obtained a compounded annual return of 14.45 percent over the life of his
>study. The standard deviation of this average return was 30.14 percent.
>When O'Shaughnessy limited himself to the 50 stocks that had earnings
growth
>for the last five years, a price to sales ratio below 1.5 and the highest 1
>year relative strength, he obtained a compounded annual return of 18.22
>percent with a standard deviation of 25.99 percent.
>
>As a speculator, rather than a buy and hold investor, a higher standard
>deviation is desirable because I make my money from price fluctuations. I
>guess the only advantage to including the price to sales in my screen is
that
>it reduces the amount of data entry I have to perform. I am glad this
forum
>could help me to figure out I am better off, as a speculator, using
technical
>factors alone and that, as a speculator, fundementals are a bunch of crap.
>
>Dan Harelson
>Pocatello, ID USA
>
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