I previously reviewed the First Edition. Now it is time for the Fourth Edition. Rather than do a teardown, I think it would be more useful if I explained how the book can best be used. Here goes:
There has been a lot of research done on stock returns, the results of which have encouraged investment in:
- Cheap stocks relative to book value, earnings, sales, EBITDA, FCF, etc.
- Stocks with strong price momentum.
- Stocks with strong earnings quality.
And such is true of this book. And so, I encourage investors to focus on earnings quality, cheapness, and maybe, momentum, which hasn’t done so well of late. (Probably too many following it.)
Now, the wrong way to use the book is to look at the highest returning strategy of the past, and follow it. Since they test so many strategies, the one at the top is an accident of the historical period it covered. Far better to be more humble and use a strategy that borrows from many successful strategies. In doing that, there is less chance of amplifying the noise of the past.
The danger of this book is data-mining. The deeper you dig to find what would have worked best in the past, the more you mirror the idiosyncrasies of the past, which does not then reveal the long-term principles that generally work, over intermediate-term periods.
Far better to stick with “pretty good” methods that never reach the top, but usually work. Don’t be concern about hitting home runs, as much as getting on base regularly. I say this because it works well for me and my clients.
Who would benefit from this book: Most investors would benefit from this book, if they are careful not to grab for the “brass ring” and imitate the strategy that has worked best in the past. If you want to, you can buy it here: What Works on Wall Street.
Full disclosure: The publisher asked if I wanted the book. I said “yes” and he sent it to me.
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