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Legendary Wall Street investor reveals: How to consistently beat the market for 42 years running

by , 03 September 2015

As an investor it can be difficult to pick a strategy that works for you. You often hear of value, growth contrarian or momentum strategies.

But which strategy is deemed the best? Or, which is the most likely to help you pick greats stocks, with good returns?

There's no straight answer to these questions. However, one investor has created a successful formula by analysing different investment strategies.

The investor I'm taking about is James O'Shaughnessy.

Between 1954 and 1996, James O'Shaughnessy back-tested the performance of dozens of stock picking strategies on the S&P Compustat database.

From his in-depth stock market research, he developed two specific strategies that helped him beat the S&P 500's average compound return, over 42 years.

Here's how you can use those same principles to beat the JSE over the next 42 years...

The ultimate formula to discover the best growth and value stocks on the JSE

When James O’Shaughnessy studied the results of his research, he created his own formula called the "United Cornerstone strategy" - combination of growth and value focussed methods.

This strategy is powerfully simple: It only uses very few criteria and there are no confusing formulas or ratios to understand.

Here's how it works:

#1: The James O’Shaughnessy “Cornerstone Value” strategy: In this strategy, he uses just five criteria to find large companies with solid cash flows and attractive dividends. The fundamentals he looks at are…

  • Market cap must be greater than R1.5 billion.
  • A company's cash flow per share must be greater than the average of the market cash flow per share.
  • A company's total number of outstanding shares must be in excess of the market average. These are the more well-known and highly traded companies.
  • High dividend yield.
  • A company's 12 month sales must be 1.5 times greater than the markets average.

If you’re an income-orientated investor, then the “Cornerstone Value” strategy is the perfect strategy for you to pick stocks.

#2: The James O'Shaughnessy “Cornerstone Growth” strategy:  In this strategy, he hunts for good growth stocks that are cheap, using four requirements. They are…

  • Market cap must be greater than R300 million.
  • A company's price/sales ratio must be below 1.5 – shows if a company is under/over-valued.
  • A company must show persistent earnings growth over a five-year period.
  • A company must be one of the market's best performers over the last 12 months.

If you’re a value-oriented growth investor, have a lot of patience and the personality to stick with a purely quantitative investment approach, then you should look at the “Cornerstone Growth” strategy to pick stocks.

Just remember, the “Cornerstone Growth” strategy must be used with growth stocks. Likewise, the “Cornerstone Value” strategy  for value stocks.

Even though James O’Shaughnessy “United Cornerstone” strategy is purely quantitative, he also emphasises the importance of having the right mind-set and being emotion-free when investing in the stock market.

James O’Shaughnessy says, "The problem with investors is that they hit down markets and, suddenly, they change up their strategies. This is a terrible mistake and one that ends up costing people a lot of money. The smarter way to invest is to choose a proven method of separating winners from losers and then adhere to it, in good times and bad."

The James O’Shaughnessy strategy identified three winners for our Stock of the Month portfolio

I’ve already used the James O’Shaughnessy "United Cornerstone" strategy to pick three winners for my Stock of the Month portfolio:

  1. 2013 – BHP Billiton made 36.6% (44.3% including dividends) in 2 years.
  2. 2014 – Sasol made 15.5% (29% including dividends) in 15 months.
  3. 2015 - Afrimat – made 10.8% in 2 months (It’s still in our portfolio).

Now, this year I've found another great stock that meet the James O’Shaughnessy strategy criteria for my Stock of The Month readers. But, if you want the details, you need to read the September issue of Stock of the Month.

To find out more about this market-beating portfolio how I use the James O’Shaughnessy strategy to find great value/growth stocks, then click here

Legendary Wall Street investor reveals: How to consistently beat the market for 42 years running
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