He is famous for his all time best-seller "What Works On Wall Street", where he took 52 years of data (1952 to 2004)on the US stock markets and sought to find which were the best value indicators among Price/Earnings, Price/Sales, Price/Cashflow and Price/Book over this period to derive portfolios that delivered the highest risk adjusted returns. He also looked at growth indicators such as Return on Equity (ROE), EPS growth, Relative Strength etc and also combinations of various value and price indicators.
Besides confirming much other international research that low Price-to-x values on average out-perform high values, O'Shaugnessy was the first to look at other characteristics of the portfolios built with these strategies such as standard deviation, Sharpe ratios, base rates (how often the strategy beat the market) and worst falls (draw-downs).
His aim was to find those strategies that delivered the best risk adjusted returns on average over 5 to 10 year periods. His findings culminated into one Value-based strategy, "Cornerstone Value" and one Growth based strategy "Cornerstone Growth", both of which consistently and emphatically beat the indices and all other strategies he considered over the 50 year period. He even established two mutual funds based on the strategies. We will be covering these two strategies on the JSE through the Cornerstone Blogs.
Although O'Shaughnessy found some strategies that outperformed the Cornerstone strategies by significant margins, their standard deviations, Sharpe ratios, drawdowns and base rates were of a nature that many investors probably could not stomach. Even though these strategies outperformed in the long run, they had some pretty wild rides and often would be declining when the overall market was rising. O'Shaughnessy did not believe that the majority of investors could psychologically deal with this and thus Cornerstone strategies were picked as his best strategies, which still outperformed the indices.