- O’Shaughnessy’s book “What Works on Wall Street” backtests single and multi-factor models.
- Rather than using a single factor (eg. P/E), you can improve performance by using O’Shaughnessy’s composite model. This is an efficient way for an investor to generate investment ideas.
- An investor can overlay an additional model as a further filter such as Piotroski’s F-Score to help in the selection process.
- The top 30 of stocks in the Russell 3000 is shown, ranked using the F-Score.
- From the list, I hold Valero Energy (VLO) and Trinity Industries (TRN).
One of the best ways an investor can beat the market is to use a backtested screen or model that is based on value investing. James O’Shaughnessy in his investment classic “What Works on Wall Street” presents a simple multi-factor model which can easy be used as a starting point. From there investors can do traditional bottoms-up analysis to pick the best opportunities. Personally I use such types of value models as a screen for the majority of the investments in my portfolio. This is a good starting point and I believe is a solid approach.
O’Shaughnessy’s value composite consists of the following six factors:
1) Price to Book
2) Price to Sales
3) Price to Cash Flow
4) Price to Earnings
5) Enterprise Value to EBITDA
6) Shareholder yield
To read the entire article go to: Use O’Shaughnessy’s Screen To Find Value