What Works on Wall Street (O'Shaugnessy) Message Board

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Strategies & Market Trends : What Works on Wall Street (O'Shaugnessy)

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To: Brian Channon who wrote (35)	3/4/1997 2:18:00 PM
From: sea_biscuit	of 109

Brian : Here is an excerpt from an interview that O'Shaughnessy gave to Barron's a few weeks ago. He says that buying high profit- margin companies actually didn't work! What really works is (surprise...) momentum! But, according to O'Shaughnessy, history has shown that if one keeps chasing momentum without any consideration for value criteria such as PSR, one ends up getting fried! Read on... Dipy. ---- Begin Excerpt ---- [...] Q: If that's true, why are so many money managers still buying on momentum? A: Actually when we did all the growth studies, the only one that worked was buying price momentum, believe it or not. I was shocked! Buying five-year earnings growth didn't work. Buying high profit margins didn't work. Buying high return ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ on equity didn't work. The only one that did well was price momentum. Q: Stock price momentum--relative strength--not earnings momentum. A: Yes, but at an extreme cost. You can't use momentum alone, because the volatility is so high it will kill you. [...] Q: So, you're looking for stocks where the stock price divided by the number of sales per share outstanding is less than one? A: Yes. Any time it's below one is a real bargain; I will expand that all the way up to 1.5 times sales if I am also going to get a stock price that is up over the previous year. Q: So your first screening device is a price-to-sales ratio below one. That gets you your value component. A: Then you use price momentum. That is what separates this strategy from the idiotic momentum players who will pay ten or 20 times sales when the stock price is doing well. What we are looking for is a measure of safety so that even if we are wrong on the momentum side, we are still getting a stock where we are buying a buck's worth of sales for under a buck. [...] ---- End Excerpt ----

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