O'SHAUGHNESSY : | Back to his Strategies | Cornerstone Growth Blog |

This was the best growth strategy covered in O'Shaughnessy's book. Although his book found that growth factors on their own did not perform as well as value factors when deriving mechanical portfolios, there was one exception, which was dubbed the Cornerstone Growth strategy.

This strategy delivered 18% compound growth for the last 50 years on the US markets, a significant out-performance of the benchmarks. It also features as number 7 in the PowerStocks Best Strategies of the Decade, delivering 14.8% compound growth over the last 10 years against the US Market average of 5%.

Although not the most aggressive growth strategy among all those out there, it had all the other things going for it that are crucial for the man in the street to enable him to stick with the strategy namely safety, very reasonable returns, consistency and high base (win) rates.

O' Shaughnessy, through his experience of managing mutual funds, witnessed how investors would head for the hills and sell out when a strategy underperformed the indices for even short periods and therefore was convinced that strategies' other factors such as risk adjusted returns, base rates etc were as important as the absolute return.

Although it is called a growth strategy it essentially combines the strongest Value factor his book discovered, namely the Price/Sales ratio, with the strongest growth factor he found, namely Relative strength. O' Shaughnessy discovered in his research of the last 50 years that strong value factors (such as price/sales, price/book etc.) combined with relative strength produced very powerful strategies.

The value factor is there to ensure you don't overpay for your shares and the relative strength provides the growth momentum. The reasoning was that shares with low valuations but rising momentum (relative strength) were in the process of "being discovered" by the market and shares passing his stock screens were at the ideal times to be invested in.


The strategy can be defined as thus:

  1. Choose a universe of shares that are liquid enough. We do this by eliminating the bottom 25% of the JSE by market capitalisation
  2. Choose shares with a Price/Sales ratio of 1.5 or less.
  3. Only look at shares that have shown positive earnings growth in the last 12 months
  4. Ensure the 3 month price appreciation is greater than the market average
  5. Ensure the 6 month price appreciation is greater than the market average
  6. Rank the resulting list by price appreciation over the last 12 months and pick the top 10 shares

To follow this strategy, go to the Cornerstone Growth strategy blog.

 
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