What Works on Wall Street – Jim O’Shaughnessy

James Patrick O’Shaughnessy is an American investor and the founder, Chairman, and Chief Investment Officer of O’Shaughnessy Asset Management, LLC (OSAM), an asset management firm headquartered in Stamford, Connecticut.

Notes

  • Only point of failure of passive investors is panicking during market corrections and selling out all of his/her index funds
  • Active failures face 2 points of failure: first is same as the passive investor of selling during market corrections, second is comparing our investment strategy with the benchmark
  • People mismatch their time frames when comparing with the benchmark (such as comparing on a quarterly basis which is all noise)
  • Must value process over outcome
  • To compare strategies, use a base rate: how often does strategy beat its benchmark and how much
  • Successful money manages don’t pay attention to forecasts
  • CXO tracked results of 6,582 predictions from 68 investment gurus made between 1998 and 2012. 42 Gurus (70%) had accuracy scores below 50%
  • Successful active investors think in probabilities

Recency Bias

  • Recency bias: paid greatest attention to what has happened recently and then forecasted that bias hence compounding that error
  • Example given that if a doctor had a drug with 50/50 efficacy, and tried it on the first patient and worked really well. If the doctor mentioned to the 2nd patient that the 1st patient took the drug and worked really well, the likelihood of the 2nd patient to agree and take the drug increases even though the odds of the drug working doesn’t change
  • Another example is Bloomberg surveys for investors: most bullish when the market is extremely outperforming, lowest bullishness is at bottoms of market corrections

Availability Bias

  • Human tendency to think that examples of things that come readily to mind are more representative than is actually the case

Buffet’s SEO Algorithm:

  • Recognizable brands with a wide market
  • Simple, easy to understand products and services
  • Consistent, solid earnings over a long time period
  • Low + manageable debt
  • Good ROE and other solid ratios