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 DISCIPLINE IS KEY, SAY QUANTITATIVE INVESTORS
 

   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on February 01 2005 (Read the original paper in French here).

 

   Why does the S&P 500 index perform better than 80% of mutual fund managers? Because it’s a strategy that is applied in an entirely mechanical, disciplined and consistent fashion to bet on 500 of the largest American corporations.

   The index approach (based on the S&P 500 or another index) does not change ideas and strategies on its way; it is not influenced by emotions, trends or the opinions of the moment.

   The new champion of this investment philosophy in the United States is named James O' Shaughnessy. It can be described like one of the best-known quantitative analysts and stock market statisticians of last ten years.

   At only 37, he had already published the three works which were going to make of him one of the investment references of this end of century.

   O' Shaughnessy is a quantitative analyst who believes in simple and mechanical investment strategies, but who is not satisfied with investments following only the stock market indexes.

   For instance, one of his preferred strategies consists of a selection of securities which is proceeded in three steps with the help of stock exchange data bases: 1- to initially choose all the companies which carried out positive profits over the five last years; 2- then, to retain those having a yearly price/sales ratio lower than 1.5; 3- finally, to identify in this group the 25 or 50 securities which have known the best stock market price performance over the last 12 months.

   You hold this portfolio for exactly one year. At the end of the year you redo the same exercise, in order to identify and to keep in your portfolio the companies which match these three criteria.

   O' Shaughnessy believes that the best strategies combine at the same time a criterion of value and a criterion of growth (in particular the price momentum). You then obtain the best of the two worlds. Thanks to the criterion of value, the investor ensures himself to put the hand on securities which are not out of price and which are still good bargains, even if their prices has increased considerably over the last year.

   The appreciation of the security price over the last 6 or 12 months already announces a renewed interest from the investors. To spot good bargains is a thing, but to spot bargains which start to be recognized by several investors is even better.



How to Retire Rich


James P O' Shaughnessy

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   André Gosselin

 
 
 
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