Imagine spending decades analyzing and testing hundreds of investment strategies, all with one goal: discovering what *really* works on Wall Street.
Well, one legendary investor did exactly that — and his name is James O’Shaughnessy.
While he may not be a household name like Warren Buffett, O’Shaughnessy’s impact on the world of investing is profound. In his groundbreaking book *What Works on Wall Street*, O’Shaughnessy reveals the results of his extensive research into the most successful investment strategies. He didn’t just speculate about what works — he tested hundreds of financial ratios and historical performance data to determine the absolute best strategies for growth and value investors.
The result? O’Shaughnessy developed two standout strategies that consistently beat the market — one focused on value investing and the other on growth investing.
His value strategy would have turned an investment of R10,000 into a staggering R3.5 million. But what’s even more impressive is his *growth strategy*, which would have turned that same R10,000 into a jaw-dropping R13.8 million!
According to O’Shaughnessy’s research, this growth strategy is the *best* strategy for investors seeking long-term capital appreciation.
### How O’Shaughnessy Discovered the Ultimate Growth Strategy
James O’Shaughnessy didn’t just throw darts at a board. He meticulously tested and analyzed simple growth indicators over a 42-year period (from 1954 to 1996), backtesting them across various market conditions. His aim was clear: to identify the optimal combination of growth metrics that would allow investors to outperform the market consistently.
What did he find? While most individual growth indicators — such as earnings growth, price-to-earnings ratios, and others — were helpful, none stood out as a silver bullet. However, O’Shaughnessy discovered that when you combine certain key growth indicators in a *specific way*, you can create a strategy that consistently outperforms the market.
The result of his research was the **Cornerstone Growth Strategy**, a combination of four powerful factors that allowed him to beat the S&P 500 by an average of 5% annually for 42 years.
### The Cornerstone Growth Strategy: A Formula for Success
The real genius of O’Shaughnessy’s approach lies in its simplicity. The Cornerstone Growth Strategy uses just four key metrics to identify high-potential growth stocks. By focusing on companies that exhibit these qualities, investors can maximize their chances of finding stocks that will deliver substantial long-term growth.
1. **Market Capitalization Over R150 Million**
The first criterion is a market cap of at least R150 million. O’Shaughnessy used this metric to avoid illiquid stocks, which are harder to trade and often prone to volatility. While smaller companies can offer greater growth potential, they also carry more risk. By setting a minimum market cap threshold, O’Shaughnessy focused on companies that were large enough to be stable, yet still had substantial growth opportunities.
2. **Consistent Earnings Growth Over Five Years**
Earnings growth is critical, but O’Shaughnessy found that *consistency* mattered more than sheer growth rates. A company that shows steady, reliable earnings growth over time is more likely to continue performing well in the future. Companies with erratic earnings growth may present higher risks, even if they’ve had a few strong years.
3. **Price-to-Sales Ratio Below 1.5**
The price-to-sales (P/S) ratio is a key indicator of a company’s valuation relative to its sales. O’Shaughnessy found that a P/S ratio below 1.5 was often a signal that a company was undervalued, even if it had strong growth prospects. By focusing on companies with lower P/S ratios, O’Shaughnessy was able to identify growth stocks that were still trading at reasonable prices — a crucial component of long-term investment success.
4. **Top 50 Stocks by Relative Strength**
Relative strength measures how a stock has performed relative to the overall market. O’Shaughnessy ranked stocks based on their price performance over the past 12 months and selected the top 50 with the highest relative strength. The rationale? Winners tend to keep winning. Companies that have outperformed the market are more likely to continue doing so, making relative strength a critical component of the strategy.
### Proven Performance in Any Market Condition
What’s truly remarkable about the Cornerstone Growth Strategy is its ability to deliver outstanding returns in all market conditions. Between 2001 and 2011, a period that included both the dot-com bubble and the 2008 financial crisis, the strategy returned an impressive 18% annually. By contrast, the S&P 500 limped along with a return of just 0.7% during the same period.
This track record proves that the Cornerstone Growth Strategy isn’t just a fair-weather winner; it’s a strategy that can perform well during periods of economic turbulence, recessions, and even market crashes.
### A Strategy That Works for YOU
The simplicity and effectiveness of the Cornerstone Growth Strategy mean that it’s accessible to all investors, from beginners to seasoned pros. By focusing on just four key metrics, O’Shaughnessy’s approach provides a clear roadmap for identifying growth stocks that have the potential to outperform the market over the long term.
And the results speak for themselves: O’Shaughnessy’s Cornerstone Growth Strategy outperformed the S&P 500 by 5% annually for over four decades — a feat that few investment strategies can claim.
As investors, we can all take a page from O’Shaughnessy’s playbook. Whether you’re a seasoned professional or just starting out, the Cornerstone Growth Strategy provides a reliable framework for building a portfolio that can deliver exceptional growth over time. And as those who follow my Real Wealth portfolio already know, this kind of disciplined, research-backed approach to investing is exactly what leads to sustainable, long-term success.
In the end, investing isn’t about chasing fads or trying to predict the next big trend. It’s about identifying proven strategies — strategies like O’Shaughnessy’s Cornerstone Growth Strategy — that have stood the test of time. And as *What Works on Wall Street* demonstrates, this growth strategy is one of the best tools in any investor’s toolkit.
Not a subscriber to Money Morning?
You can get free daily recommendations like these with Money Morning eletter. Just sign up here.
