O’Shaughnessy, 53, is the author of the 1997 bestseller What Works on Wall Street and one of the most formidable crunchers of historical market data in the business. His Connecticut-based O’Shaughnessy Asset Management manages $6.4 billion (U.S.) and is a sub-adviser on seven Royal Bank of Canada O’Shaughnessy mutual funds.
Stocks have had a good run since 2009. Are they getting too expensive?
Stocks in the U.S. are about 150% higher than they were in 2009. At that time, we did a calculation based on 20-year averages: What would the market have to go through by 2019 to match the worst 20-year period ever? If memory serves me, it was 6% average annual gain after inflation. If we look back in 2019, I’m not saying that stocks will be giving huge double-digit returns, but I do think they will end up being one of the best-performing asset classes.
What are the biggest risks investors face right now?
Extrapolating the bond market’s fantastic performance since 1981 into the future. We think long-term bonds will be going into a multidecade bear market, and we’re urging investors to invest only in short-term bonds. My entire adult life has been lived in a bull market for bonds. But bonds can be very risky, especially over long periods. If you’d started investing in 20-year bonds in 1940, by 1981, you would have had about a 63% real total loss on the portfolio. I’m not saying don’t buy bonds; I’m saying be careful which bonds you buy.
What one piece of general advice would you give to investors right now?
Establish an asset allocation and then rebalance it when it gets 15% out of whack. Really, if investors could just do that, they could substantially improve their overall performance.
What about picking individual stocks? What numbers or ratios work best?
Our value composite consists of five elements: price-to-sales, price-to-earnings, EBITDA-to-enterprise value, free cash flow-to-enterprise value and shareholder yield. For all 10-year periods, the value composite has outperformed any one of its constituents 85% of the time.
What was your best investment?
The data our firm uses to conduct our research on investment strategies. It is our second-largest expense after people. The data includes Standard & Poor’s Compustat, Thomson’s Worldscope, MSCI and the University of Chicago securities data and prices that go back to 1926. It allows us to answer questions like, how often does a strategy beat its benchmark and by what magnitude?
What was your worst investment?
OEX put options, based on the Standard & Poor’s 100 [which investors use as insurance against a market downturn], just before the crash in 1987. I was trading on my own account, and I was doing a lot of work with the Black-Scholes formula for options pricing. The puts tend to go up in price if the market goes down, and they were really acting up, so I thought the market knew something I didn’t. I slowly began acquiring puts. But then the market had a great day just a few days before the crash. I lost my nerve and I emotionally sold the puts at a loss. I don’t even want to tell you what I would have made if I had held on through the crash. Shoulda, woulda, coulda.
Who is your investing hero?
Definitely Ben Graham. I’m just lucky he didn’t have computers; otherwise, he would have written What Works on Wall Street.