What Works on Wall Street is essentially an encyclopedia of different quantitative approaches to profiting in the stock market. In essence, the book breaks down the performance of several value and momentum investment strategies.
Author James O'Shaughnessy, the Chairman and CEO of O'Shaughnessy Asset Management, is a firm believer in quantitative analysis. He shows that buying buckets of stocks (25-50) with low prices ratios, high shareholder yields, and strong price momentum are certain to outperform any other market strategy over time.
Simple Models Beat Expert Opinions
In the first few chapters, O'Shaughnessy lays a foundation for why quantitative approaches beat qualitative analysis. Using the example of indexing, he shows that discipline and consistency can make almost any investment approach profitable. By the same token, he discusses Ochman's Razor and the concept that simplicity is superior to complexity nearly every time. Furthermore, O'Shaughnessy shows that in any field, simple models persistently beat experts.
The book refutes the efficient market hypothesis and makes the case that market-weighted indexes are inferior to other strategies. This is shown using highly sophisticated back-testing. O'Shaughnessy proves that investing in undervalued stocks provides the best returns in the long run.
Performance metrics for each investment strategy are discussed in a dedicated chapter for each approach. These strategies include individual price ratios, shareholder yields, accounting ratios, price appreciation, and multifactor strategies. The metrics include overall return, risk-adjusted returns, returns over various time periods, as well as the best- and worst-case scenarios.
What Works on Wall Street
As stated on the final page of the book, O'Shaughnessy accomplishes "what Ben Graham requested - the historical behavior of securities with defined characteristics."
The first edition of What Works on Wall Street was published in 1996. During the fourteen years between then and the publication of the fourth edition, the concepts have proven to be accurate.
The massively thick book may be intimidating at first, but it deserves a spot on every investor's shelf.