W hat Works on Wall Street by James O'Shaughnessy is a must-read book for all investors, be they retail or professional. The stocks that pop up on screens for lowest PSR and highest one-year performance are often companies you will have never heard of. They are not written up in the popular business press, and their president does not have his face on the cover of a well-known magazine. In fact, there is probably an inverse relationship between the long-term performance of the stock and how many times the CEO of the company is on TV or in the press. A company's profit gains in the last year are worthless in determining if a stock is a good investment.
Relative strength is the only growth variable that consistently beats the market.
Buying Wall Street's or the Tokyo market's current darlings with high PERs and high expected growth rates is the worst choice you can make. Conversely, being too contrarian by buying last year's biggest losers is also a very bad choice. The performance of these stocks is subsequently as bad as the stories are good. The reason is that these fund managers fail to stick with one investment method for good or bad, year in and year out. When technology stocks are hot, there will be tons of new technology funds.