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Trending Value Metrics by O’Shaughnessy

James O’Shaughnessy is a well known “value quant” for his book What Works on Wall Street (4th Ed). He has a new column in Marketwatch discussing what he calls  “the top stock-market strategy of the past 50 years.”

According to Jim, using a combination of value and momentum strategies — “Trending Value” — is the best performing strategy since 1963. To capture this, he ranks stocks based on:

• Price-to-Sales
• Price-to-Earnings
• Price-to-Book
• Price-to-Cash Flow
• EBITDA/Enterprise Value
• Shareholder yield (dividend yield + rate of share repurchases)

O’Shaughnessy ranks all of these on a 1-100 basis for his Trending Value portfolio. He works with the top 10% of those ranked stocks with the best composite score. He selects a concentrated portfolio of 25 stocks based on trailing six-month momentum, creating an extremely cheap group of stocks that are on the mend.

Its an interesting ideas, one worth exploring . . .

Can A Trader be a do-gooder?

It occurs to me that the only way in which a trader can become more than a completely selfish, self-enriching, narcissistic person is to trade well enough so that you can manage other people’s money and thus saving these investors from crooks and charlatans (provided you are convinced you are not a crook and charlatan yourself).

Other traders have advanced other arguments in favor of trading. But I am not convinced by them.

They say that we provide liquidity to other long-term investors who may need to liquidate their investments. But then, this applies only to mean-reversal strategies. Momentum strategies take away liquidity from the market, and in some cases exacerbating price bubbles. Certainly not something your grandma would approve.

Others argue that momentum strategies help disseminate information about companies through quick price movements. But can’t we just watch Blue Channels? Do we really need some devious insiders to convey that information to the rest of us through price movements?

No, I think that independent trading should serve only one purpose (besides short-term self-sustenance): as training and preparation to become a fund manager. Once you graduated from independent trading, you then enter into the grand contest among all fund managers to see who can best serve and protect investors’ assets, (and be rewarded according to your standing in this contest.)

I know, this is the idealistic way to look at things. Serving and protecting seem to be what policemen should be doing, not traders. But as in quantitative trading, I think it helps one becomes more successful in one’s activities by having a simple guiding principle or model. And it doesn’t hurt that in this case, the principle would also be conscience-nourishing!