STREET DOGS

From Jim O’Shaughnessy, chairman and CEO of O’Shaughnessy Asset Management:

In the first few editions of my book, I proclaimed price-to-sales to be the “king of value factors”. At the time, I only looked at individual factors and price - to sales proved itself to be head and shoulders above all the others.

This was a rookie mistake. I should have remembered you can make anything look good if you varied the amount of time in your analysis. I thought, with decades of data, surely things won’t change that much going forward? But they do. Instead of focusing on how value factors in general did in identifying attractive stocks, I rushed to proclaim price-to-sales the winner. As we continued to update the book, price-to-sales was no longer the “best” single value factor, replaced by others, depending upon the time frames examined. I had also become a lot more sophisticated in my analysis and realised that everything, including factors, moves in and out of favour, depending on the market environment. I also realised you were far better off seeing how a stock scored on value factors that took more aspects of the balance sheet into account.

The lesson? No single factor or fundamental piece of data is the answer or solution to the complicated question of how to pick stocks that outperform. For example, I have long been a fan of shareholder yield (dividends + net buy-backs) but though it performs well on its own, it performs much better when selected from a group of stocks that are very cheap, have good earnings quality and have a high conviction in their buy-backs, as evidenced by percentage of outstanding shares they are buying.

As Einstein is reputed to have said, “make everything as simple as possible, but not simpler”.