Tag Archives: James O’Shaughnessy

When It Comes To Growth Or Value, Have Your Cake And Eat It Too

It’s extremely common to hear investment commentators talk about “growth” and “value” as though they are polar opposites. But Validea CEO John Reese says not to buy that false notion.

“When it comes to investing’s great ‘either/or’ – that is, the growth or value debate – you can have your cake and eat it, too,” Reese writes for Canada’s Globe and Mail. “That’s because the great growth versus value debate is, in fact, a false choice. … Confining yourself to either value stocks or growth stocks is only limiting your portfolio’s potential. At certain times, you’ll be able to find more attractive growth-type picks; at other times, the market will be offering more value-type plays. Having a portfolio of growth-focused and value-focused stocks can also help smooth your returns over the long haul, since the two styles take turns leading the market.”

Reese says the “fallacy of the growth-versus-value notion goes even deeper. … That’s because implicit in the debate is the idea that any given stock is either a value stock or a growth stock, and that’s just not true.” He highlights a pair of stocks that currently get approval from the growth strategy he bases on the writings of renowned quantitative investor James O’Shaughnessy — and a separate value strategy he bases on O’Shaughnessy’s writings. One of them: AXA, a Paris-based financial company that’s involved in life insurance, property and casualty insurance, asset management and banking.


Value Portfolio, Meet Big Mo’

Much like a shot of nutrient-rich wheatgrass can add a “power boost” to your morning smoothie, a shot of momentum can add a big boost to your value investing portfolio, Validea CEO John Reese says.

The idea of focusing on hot stocks may make value investors, who tend to find bargain-priced stocks amid the beaten-down members of the market, cringe, Reese writes in his latest for Canada’s Globe and Mail. “But value stocks aren’t always falling. Nor are red-hot stocks always expensive,” he says. “While they are often portrayed as polar opposites, value and momentum are really two separate concepts. Value metrics give you a snapshot of what a stock’s valuation is at a given time, regardless of whether the stock has been rising or falling. You’ll find plenty of cases in which a stock is so cheap that it can get quite hot for an extended period, and still be undervalued.”

Reese says those are the kinds of stocks you want to key on. He discusses the research of quantitative investing guru James O’Shaughnessy, noting that O’Shaughnessy’s rigorous testing of various strategies has shown that the best approaches historically have included both value and momentum variables. He also cites other studies showing that a combination of value and momentum strategies has been very effective not only in the US stock market, but also in global markets for a variety of assets.

“The idea of combining value and momentum in a single stock-picking strategy makes a lot of sense,” Reese writes. “Momentum is a powerful force in investing. We human beings have a tendency to follow the crowd, which means today’s winners tend to keep winning. The problem occurs when the crowd pushes the winners far past fair value – tech stocks of the early 2000s are probably the best example of that. At some point (and there’s no way of telling precisely when), momentum won’t be enough to keep a vastly overvalued stock rising; when that happens, it’s often as though investors realize that the emperor has no clothes – that the stock is worth nowhere near what people have been paying it – and the trend can reverse. Before you know it, all of your gains can be wiped out. When you combine momentum with value, however, you avoid the risk involved with those high-flying, overpriced stocks, while still getting the benefit of the market’s momentum.”

Reese looks at a trio of stocks that currently have both strong momentum and attractively priced shares, and which also get strong interest from his “Guru Strategies,” which are based on the investing approaches of Warren Buffett, O’Shaughnessy, and other highly successful investors. Among the stocks he highlights: JetBlue Airways, which passes his Peter Lynch-based model.

O’Shaughnessy Emphasizes the Value of “High-conviction” Buybacks Over the Long Term


Jim O’Shaughnessy, O’Shaughnessy Asset Management, says a long-term investor should be buying now, and compares “low-conviction buybacks” (defined as 5% or less) and “high-conviction buybacks” (over 5%) in identifying attractive stocks. From 1987 to 2014, he says, the return on low-conviction buybacks was 12.1% annually (about 1% over return on all large stocks), but the return on high-conviction buybacks was 15.9% annually. Further, he says that the buyers of these high-conviction buyback stocks “were buying their stocks when they were dirt cheap.” Of all buybacks, 70% are low-conviction, according to O’Shaughnessy.

Going forward, O’Shaughnessy says investors should be taking a value investing approach. “Over long periods of time, value trumps growth, and significantly trumps growth.” He described expensive stocks as “lottery stocks,” noting that some do very well but the average return is negative. To evaluate the value of stocks, he uses a composite of various factors (such as price to earnings) that he found “beats any given factor 82% of all rolling 10-year periods.”

O’Shaughnessy does not think a bear market is on the horizon. Sounding a note of caution, he notes, “human psychology plays such a part in investment psychology,” explaining “fear, greed, and hope have wiped out more investment value than any bear market ever can.”

Great Pages: O’Shaughnessy On Models vs. Humans

Can a single page of a book change your investment life? We believe it can. Periodically, we highlight some of the Great Pages that have had a great impact on our investment philosophy. Today, we cheat just a bit, looking at two pages in James O’Shaughnessy’s classic “What Works on Wall Street”. O’Shaughnessy talks about why models are better at predicting outcomes than humans are.

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The Best Sector For The Long Haul Isn’t What You Might Think

Every other issue of the Validea Hot List newsletter examines one the investing greats behind John P. Reese’s computerized Guru Strategies. This latest issue looks at the James O’Shaughnessy’s research into the best sector for the long term.

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OSAM: Microcaps A Better Opportunity Than PE

Over the past decade or so, investors — particularly institutional investors — have focused more and more on private equity as a way to get exposure to small, potentially high-growth companies. But in a recent research paper, O’Shaughnessy Asset Management’s Chris Meredith and Patrick O’Shaughnessy explain why microcap equities in many cases are a more attractive alternative to private equity.

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Take It From The Gurus: Boring Is Beautiful

In a recent article for Canada’s Globe and Mail, Validea CEO John Reese says that when it comes to investing, boring is beautiful.

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