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
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
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
in our bookstore