What Works on Wall Street

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ISBN: 9780071452250 | 0071452257
Cover: Hardcover
Copyright: 5/24/2005

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"A major contribution . . . on the behavior of common stocks in the United States." --Financial Analysts' JournalThe consistently bestsellingWhat Works on Wall Streetexplores the investment strategies that have provided the best returns over the past 50 years--and which are the top performers today. The third edition of thisBusinessWeekandNew York Timesbestseller contains more than 50 percent new material and is designed to help you reshape your investment strategies for both the postbubble market and the dramatically changed political landscape.Packed with all-new charts, data, tables, and analyses, this updated classic allows you to directly compare popular stockpicking strategies and their results--creating a more comprehensive understanding of the intricate and often confusing investment process. Providing fresh insights into time-tested strategies, it examines: Value versus growth strategies P/E ratios versus price-to-sales Small-cap investing, seasonality, and more

Preface

xviii

Acknowledgments

Stock Investment Strategies: Different Methods, Similar Goals

(12)

Traditional Active Management Doesn't Work

(1)

What's the Problem?

(2)

Studying the Wrong Things

(1)

Why Indexing Works

(2)

Pinpointing Performance

(1)

Discipline Is the Key

(1)

Consistency Wins

(1)

A Structured Portfolio in Action

(1)

Overwhelmed by Our Nature

(1)

Case Study: The Dogs of the Dow

(4)

The Unreliable Experts: Getting in the Way of Outstanding Performance

(18)

Human Judgment Is Limited

(1)

What's the Problem?

(1)

Why Models Beat Humans

(2)

Base Rates Are Boring

(1)

The Individual versus the Group

(1)

Personal Experience Preferred

(1)

Simple versus Complex

(1)

A Simple Solution

(2)

Additional Reading

(1)

Case Study: Using Long-Term Data to Make Predictions about the Future

(7)

Rules of the Game

(18)

Short Periods Are Valueless

(2)

Anecdotal Evidence Is Not Enough

(1)

Potential Pitfalls

(3)

Rules of the Game

(11)

Ranking Stocks by Market Capitalization: Size Matters

(22)

Best of Times, Worst of Times

(4)

How Much Better Are Small-Cap Stocks?

(2)

Reviewing Stocks by Size

(2)

Small Stocks and Market Leaders

(1)

Small Stocks Are the Winners, But Not by Much

(1)

Market Leaders and Small Stocks: A Better Way to Create an Index

(9)

Implications for Investors

(1)

Our Two Benchmarks

(1)

Price-to-Earnings Ratios: Separating the Winners and Losers

(20)

The Results

(4)

Large Stocks Are Different

(1)

High PE Ratios Are Dangerous

(6)

Large Stocks Fare No Better

(1)

Best- and Worst-Case Returns

(1)

Deciles

(1)

Implications

(4)

Following This Advice in Real Time

(3)

Price-to-Book Ratios: A Better Gauge of Value

(18)

The Results

(1)

Large Stocks Are Less Volatile

(2)

Large Stocks Base Rates Are More Consistent

(1)

High Price-to-Book Stocks---A Wild Ride to Nowhere

(5)

Large Stocks Are No Different

101

(1)

Best- and Worst-Case Returns

102

(1)

Deciles

103

(1)

Implications

104

(5)

Price-to-Cashflow Ratios: Using Cash to Determine Value

109

(18)

The Results

110

(2)

Large Stocks Are Less Volatile

112

(1)

Worst-Case Scenarios and Best and Worst Returns

113

(3)

High Price-to-Cashflow Ratios Are Dangerous

116

(4)

Large Stocks Hit Too

120

(2)

Worst-Case Scenario and Best and Worst Returns

122

(1)

Deciles

123

(3)

Implications

126

(1)

Price-to-Sales Ratios: The King of the Value Factors

127

(16)

The Results

128

(3)

Large Stocks with Low Price-to-Sales Ratios Do Well

131

(1)

Best- and Worst-Case Scenarios

132

(2)

High PSR Stocks Are Toxic

134

(1)

Large Stocks Do a Little Better

135

(4)

Deciles

139

(3)

Implications

142

(1)

Dividend Yields: Buying an Income

143

(12)

The Results

144

(4)

Large Stocks Entirely Different

148

(2)

Worst-Case Scenarios

150

(1)

Deciles

151

(2)

Implications

153

(2)

The Value of Value Factors

155

(12)

Risk Doesn't Always Equal Reward

156

(1)

Is It Worth the Risk?

157

(2)

Embrace Consistency

159

(1)

Large Stocks Are More Consistent

160

(3)

Implications

163

(2)

Learning to Focus on the Long Term

165

(2)

Do High Earnings Gains Mean High Performance?

167

(18)

Examining Annual Earnings Changes

168

(2)

Large Stocks Do Worse

170

(1)

Best- and Worst-Case Returns

171

(2)

Buying Stocks with the Worst Earnings Changes

173

(1)

Large Stocks Do Better

174

(4)

Best- and Worst-Case Scenarios

178

(2)

Deciles

180

(1)

Implications

180

(3)

Case Study: Do Sales Increases Work Better Than Earnings Gains?

183

(2)

Five-Year Earnings-per-Share Percentage Changes

185

(12)

The Results

185

(4)

Large Stocks Slightly Outperform Universe

189

(2)

Best- and Worst-Case Returns

191

(1)

Deciles

192

(2)

Implications

194

(3)

Profit Margins: Do Investors Profit from Corporate Profits?

197

(12)

The Results

197

(2)

Large Stocks Do Better

199

(4)

Best and Worst Case Returns

203

(2)

Deciles

205

(1)

Implications

205

(4)

Return on Equity

209

(12)

The Results

209

(4)

Large Stocks Are the Same

213

(2)

Worst-Case Scenarios and Best and Worst Returns

215

(1)

Decile

216

(2)

Implications

218

(3)

Relative Price Strength: Winners Continue to Win

221

(22)

The Results

222

(5)

Large Stocks Do Better

227

(2)

Why Price Performance Works While Other Measures Do Not

229

(1)

Worst-Case Scenarios and Best and Worst Returns

230

(1)

Buying the Worst Performing Stocks

230

(2)

Large Stocks Also Hit

232

(2)

Best- and Worst-Case Returns

234

(1)

Deciles

235

(3)

Implications

238

(1)

Case Study: How Well Does Longer-Term Relative Strength Work?

238

(5)

Using Multifactor Models to Improve Performance

243

(16)

Adding Value Factors

243

(2)

Base Rates Improve

245

(1)

What about Other Value Factors?

245

(2)

Price-to-Sales Has Similar Returns

247

(1)

Combining the Three Strategies

248

(1)

Test for Deviation from Benchmark

249

(1)

Additional Factors Add Less to Large Stocks

250

(2)

Price-to-Sales Ratios Do Well, Too

252

(1)

What about Growth Factors?

253

(1)

Two Growth Models

253

(2)

Return on Equity Does Better

255

(1)

Large Stocks Less Dramatic

256

(1)

Implications

257

(2)

Dissecting the Market Leaders Universe: Ratios That Add the Most Value

259

(10)

New Period Examined

261

(1)

Summary Results for Various Market Leaders Strategies

262

(2)

Multifactor Strategies Also Do Well

264

(1)

Base Rates

264

(1)

Worst-Case Scenarios

265

(1)

Implications

265

(2)

Best of Market Leaders Found in Chapter 19

267

(2)

Dissecting the Small Stocks Universe: Ratios That Add the Most Value

269

(12)

Monthly Data Reviewed, Summary Data Accessed

270

(3)

Base Rates

273

(1)

Worst-Case Scenarios

274

(1)

Implications

275

(2)

Case Study: A Note on Small-Cap Concentrated Investing

277

(4)

Searching for the Ideal Value Stock Investment Strategy

281

(14)

Focusing on Downside Risk and Return

282

(1)

A Superior All-Stocks Value Strategy

282

(2)

Market Leaders by Dividend and Shareholder Value

284

(2)

Improving on the Best

286

(2)

Digging Deeper

288

(1)

Real-Time Performance

289

(1)

Investing in a More Concentrated Portfolio

289

(2)

Implications

291

(4)

Searching for the Ideal Growth Strategy

295

(14)

Original Cornerstone Growth Strategy Revisited

295

(3)

Traditional Growth Factors Work, But Provide Lower Overall Return

298

(1)

Large Stocks Cornerstone Growth Strategy Works Well, Too

299

(2)

Improving the Original Strategy

301

(2)

Base Rates Also Improve

303

(1)

Implications

303

(4)

Case Study: Using More Concentrated Versions of the Growth Strategy

307

(2)

Uniting Strategies for the Best Risk-Adjusted Performance

309

(10)

The Results

310

(1)

50-Stock Version Works Well, Too

311

(2)

A Broader Approach

313

(3)

Implications

316

(3)

New Research Initiatives

319

(16)

Limited Statistics

320

(1)

Seasonal Analysis

321

(3)

Testing Holding Periods

324

(1)

Randomization of In-Sample Data and Testing Strategies on Other Databases

325

(1)

Sector-Specific Analysis

326

(1)

Summation Models

327

(1)

Correlation Matrix Analysis

327

(4)

Regression to Long-Term Mean within Strategies

331

(1)

Future Projects

332

(3)

Ranking the Strategies

335

(42)

The Results

336

(1)

Absolute Returns

337

(9)

The Downside

346

(1)

Risk-Adjusted Returns

347

(9)

Ranking by Sharpe Ratio

356

(1)

The Worst Risk-Adjusted Returns

357

(1)

Downside Risk

357

(10)

The Downside

367

Maximum Decline

366

(1)

The Downside

367

(1)

Blended Strategies

367

(9)

Implications

376

(1)

Getting the Most Out of Your Equity Investments

377

(8)

Always Use Strategies

378

(1)

Ignore the Short-Term

379

(1)

Use Only Strategies Proven over the Long-Term

380

(1)

Dig Deep

381

(1)

Invest Consistently

381

(1)

Always Bet with the Base Rate

382

(1)

Never Use the Riskiest Strategies

382

(1)

Always Use More Than One Strategy

382

(1)

Use Multifactor Models

383

(1)

Insist on Consistency

383

(1)

The Stock Market Is Not Random

383

(2)

Appendix

385

(8)

Bibliography

393

(10)

Index

403

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What Works on Wall Street

Summary

Author Biography

Table of Contents

Supplemental Materials

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What Works on Wall Street

Summary

Author Biography

Table of Contents

Supplemental Materials

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