O'Shaughnessy Lets History Guide

I've been following James P. O'Shaughnessy's methodology since I set up my guru strategy approach to investing three years ago. I'm glad I did. The strategy I base on his writings has been a winner from the start.

It has had, to date, truly stellar returns. Since I began my tracking on July 15, 2003, through June 16, 2006, my O'Shaughnessy strategy has produced a nearly 122% return, more than four times the S&P 500's return for the same period of roughly 25%. This isn't a fluke, in which it had a good year, only to be followed by a dismal performance. For 2005, my O'Shaughnessy strategy was up 22.4%, compared with a 3% gain in the S&P 500, and year to date, it's up 18.4% vs. 1.4% for the S&P 500.

O'Shaughnessy is a stickler for statistics. He loves plowing through numbers and finding patterns that can be turned into an investment strategy. He believes that history, if given a sufficient time horizon, will repeat itself, thus offering profit opportunities to investors who are paying attention.

Currently a fund manager at Wall Street firm Bear Stearns, O'Shaughnessy came into the public spotlight during the 1990s when he wrote three well-received books that became best-sellers. The interpretation of O'Shaughnessy's strategy that I use is based on his first-rate What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time. He used more than four decades' worth of data that he culled from Standard & Poor's huge Compustat database to ferret out the strategy he recommends.

That strategy has several characteristics worth noting. First, it is a long-term approach. He expects his strategy to be used for several years to get the effects of a full cycle of the market. However, he rebalances his portfolio at the beginning of each year, so in that respect his time horizon is one year.

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At the time of publication, Reese was long Johnson & Johnson and Procter & Gamble, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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