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Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years
A unique and timely new wealth-building strategy from a legendary investment guru
In his national bestsellers How to Retire Rich and What Works on Wall Street , portfolio manager extraordinaire James P. O’Shaughnessy offered investors practical advice based on rigorous quantitative analysis—advice that has consistently beaten the market. But in a recent analysis of market data, O’Shaughnessy uncovered some astonishing trends not discussed in his previous books. The Markets of Tomorrow explains O’Shaughnessy’s new research and tells ordinary investors what they must do now to revamp their portfolios. According to O’Shaughnessy, the year 2000 marked the end of a twenty-year cycle that was dominated by the stocks of larger, fastergrowing companies like those in the S&P 500. In the new cycle, the stocks of small and midsize companies are the ones that will outperform the market, along with large company value stocks and intermediate term bonds. O’Shaughnessy describes the number crunching behind his analysis and then shows individual investors exactly how to select the right mix of investments and pick top-performing small and midcap stocks. The Markets of Tomorrow is a loud and clear call to action for every investor who doesn’t want to be left behind.
In his national bestsellers How to Retire Rich and What Works on Wall Street , portfolio manager extraordinaire James P. O’Shaughnessy offered investors practical advice based on rigorous quantitative analysis—advice that has consistently beaten the market. But in a recent analysis of market data, O’Shaughnessy uncovered some astonishing trends not discussed in his previous books. The Markets of Tomorrow explains O’Shaughnessy’s new research and tells ordinary investors what they must do now to revamp their portfolios. According to O’Shaughnessy, the year 2000 marked the end of a twenty-year cycle that was dominated by the stocks of larger, fastergrowing companies like those in the S&P 500. In the new cycle, the stocks of small and midsize companies are the ones that will outperform the market, along with large company value stocks and intermediate term bonds. O’Shaughnessy describes the number crunching behind his analysis and then shows individual investors exactly how to select the right mix of investments and pick top-performing small and midcap stocks. The Markets of Tomorrow is a loud and clear call to action for every investor who doesn’t want to be left behind.
272 pages, Hardcover
First published March 2, 2006
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Displaying 1 - 5 of 5 reviews
January 27, 2012
Unfair for me to be ranking my own books, I know, but want to see how they affect Goodread's recommendations.
January 8, 2019
Similar book as New rules of investing.
November 15, 2009
This is a pretty well-written book. It has a good mix of data, opinion and theory. Even if you do not agree with the author's premise, it is an interesting take on the market and how it behaves.
I don't so much disagree with his idea of how the market rotates sectors, or which sectors should be stronger going forward (from when the book was written), but how the argument is supported. Like many who have "pet theories" about the markets and trends within them, the author uses available data selectively to "prove" his ideas.
Chart-reading, or technical analysis, relies on seeing "shapes" in the historical/current performance of the underlying entity (common stocks, bonds, futures contracts, whatever) to predict/explain what is or will be happening. (This is contrasted with fundamental analysis which looks only at "concrete" facts about an asset: earnings per share, stock price-to-earnings (P/E) Ratio, dividend yield, debt-to-equity ratio, and so on.)
What most people who create the technical theories do is search back through historical data for market periods that "fit" the theory and use that as evidence that the theory/method works. Some will also look for data that is similar to the "correct" set, but has a specific difference that does not match the theory and (because it is historical data) ended up not following the predictions of the method. This, too, is "proof" that the theory is solid.
What virtually no one does, and ultimately is the only "proof" of any theory or system, is to regressively apply the method to all data that has been recorded on that asset type/class for all time periods. If this sounds like a tedious procedure, you are correct. Which is why these things are run using computers. But, doing so requires (usually) writing a custom program (or buying a piece of modeling software which has sufficient flexibility) and having the data set to run it against. Most people don't have that either unless they purchase it (there is some "free" data available on-line). Finally, it does take a fair amount of CPU power to crank through all of the data --- which is probably the easiest thing for the average person to acquire.
What this will do is identify all the scenarios that the model is supposed to predict and come up with the real "scorecard" of how many times it worked or failed and how well it would have performed. Remember, exiting a position is at least as important as when to enter (buy) it. I suspect that most popular models would not survive such rigorous analysis and testing. Those that do tend to be "private" systems that you can only buy into and pay a hefty fee for. Do such exist Yes, but they tend to be exclusive high-net-worth opportunities.
What about the rest of the schemes? All "systems" rely on market psychology, to some percentage of their method, rather than fundamentals. Human behavior in the markets is not perfectly understood, but it has been studied. Originally by traders who watched others in their business and profited by "knowing" how they might act given certain inputs (prices, weather, financial news, etc.). More recently there have been a lot of books & trader trainers that attempt to get investors to see and understand how their own actions (as well as those of others) determine good and bad "trades". Some college courses have also been offered recently.
This book has interesting ideas. It can help broaden your perspective on how markets may operate and why. Just remember that piece of boilerplate from most financial instruments:
Past behavior is no guarantee of future performance!
\
I don't so much disagree with his idea of how the market rotates sectors, or which sectors should be stronger going forward (from when the book was written), but how the argument is supported. Like many who have "pet theories" about the markets and trends within them, the author uses available data selectively to "prove" his ideas.
Chart-reading, or technical analysis, relies on seeing "shapes" in the historical/current performance of the underlying entity (common stocks, bonds, futures contracts, whatever) to predict/explain what is or will be happening. (This is contrasted with fundamental analysis which looks only at "concrete" facts about an asset: earnings per share, stock price-to-earnings (P/E) Ratio, dividend yield, debt-to-equity ratio, and so on.)
What most people who create the technical theories do is search back through historical data for market periods that "fit" the theory and use that as evidence that the theory/method works. Some will also look for data that is similar to the "correct" set, but has a specific difference that does not match the theory and (because it is historical data) ended up not following the predictions of the method. This, too, is "proof" that the theory is solid.
What virtually no one does, and ultimately is the only "proof" of any theory or system, is to regressively apply the method to all data that has been recorded on that asset type/class for all time periods. If this sounds like a tedious procedure, you are correct. Which is why these things are run using computers. But, doing so requires (usually) writing a custom program (or buying a piece of modeling software which has sufficient flexibility) and having the data set to run it against. Most people don't have that either unless they purchase it (there is some "free" data available on-line). Finally, it does take a fair amount of CPU power to crank through all of the data --- which is probably the easiest thing for the average person to acquire.
What this will do is identify all the scenarios that the model is supposed to predict and come up with the real "scorecard" of how many times it worked or failed and how well it would have performed. Remember, exiting a position is at least as important as when to enter (buy) it. I suspect that most popular models would not survive such rigorous analysis and testing. Those that do tend to be "private" systems that you can only buy into and pay a hefty fee for. Do such exist Yes, but they tend to be exclusive high-net-worth opportunities.
What about the rest of the schemes? All "systems" rely on market psychology, to some percentage of their method, rather than fundamentals. Human behavior in the markets is not perfectly understood, but it has been studied. Originally by traders who watched others in their business and profited by "knowing" how they might act given certain inputs (prices, weather, financial news, etc.). More recently there have been a lot of books & trader trainers that attempt to get investors to see and understand how their own actions (as well as those of others) determine good and bad "trades". Some college courses have also been offered recently.
This book has interesting ideas. It can help broaden your perspective on how markets may operate and why. Just remember that piece of boilerplate from most financial instruments:
Past behavior is no guarantee of future performance!
\
February 27, 2008
Very interesting. I just go with retirement year index funds myself, but I love reading others' opinions on how to beat the market.
March 19, 2019
In the mid-1970s I had $5000 burning a hole in my pocket and thought I wanted to invest in the stock market. Some young stockbroker had called me and told me he had a deal for me! Luckily I was down to Stanford for a meeting with the then Treasurer of the University and he said before you invest read three books - he proposed On UP on Wall Street, the Intelligent Investor, and one book on Efficient Market Theory. (I don't think it was Fama's book which I read later). He also gave me about half a dozen papers on investment theory - R and Sharpe ratios. I was foolish enough to go through all that stuff and even eventually struggled through Benjamin Graham's tome called Security Analysis. I got talked out of buying 10 shares of Berkshire Hathaway (for a bit more than $5000 those would be worth a bit more than $3 million today - so much for the efficient market theory) and instead bought two Arizona utilities. In about 3 years I fired the young broker, sold the two stocks and began to think seriously about investing. In 1980, David Dreman wrote a book that changed my thinking about how to invest - called the Contrarian Investor which argued that companies with low debt and which were underpriced in the market would do better than those which were pegged for growth.
This book is more than a decade old but still very useful. The author argues that one needs to look at investing in assets on a 20 year cycle. He is also skeptical of other types of assets (for example he presents data that the compound rate of growth in housing prices between 1963 and 2003 is 1.55% in real returns (the rate of growth less inflation). Over the same time the S&P return was more than four times that. But all 20 year periods are not the same. He then goes on to argue that the most effective strategy for buying equities is to look to non-growth stocks and smaller companies (Dreman made a similar argument in his book). He also emphasizes that because of a lot of factors financial markets revert to the mean - based on things like valuations and demographic factors. He is a fan of small cap stocks ($200 million to $2 billion in assets).
While they may have a place in any portfolio - debt equities are, based on real returns, pretty crappy investments. Treasuries between the 1930s and the 1980s lost 3¢ on the dollar - T-bills(supposedly the safest investment) lost 18¢.
He then goes through a series of alternative portfolios. Think of a matrix - Large and Small Cap on the Vertical part and Small Cap, Mid Cap, Large Cap on the horizontal axis. He presents some speculation on what each of those portfolios will return over the next 20 years (through 2025).
He also does a chapter on demographics in which he divides the boomers into two groups 1946-54 and 54-64. He comments " two subgroups have very little in common, possess very different attitudes about life and work, and have very different ideas about how to achieve what they want in life." He is not optimistic about investment returns for the next 20 years in part because many of my generation will be drifting into retirement. (For many reasons some of those ideas have been postponed but are not inaccurate).
One other comment, he seems to suggest and I agree that hiring a competent investment manager may well be worth the risk. Warren Buffett (in 1987 I bought one share of Berkshire A for under $4000) had two good quotes about investment - the ideal horizon for an investment is a lifetime. (I violated his dicta and sold my one share several years ago for a lot of different reasons). And in one of his annual reports he told of Mr. Market - a strange person who gets up each morning and reacts irrationally to what is happening - so on some days he is overly exuberant and others overly pessimistic - a good reason not to buy stocks based on fashion. An investment manager can tame Mr. Market in each of us!
There are some burps in his prognostication (besides the projections on returns between 2005-and 2020). For example, he highlights PG&E as a sound company. That may have been true based on numbers at one time - but no more. But the over all thinking in the book is worth spending some time with.
O'Shaughnessy's book is a quick read. But it is well worth the time. I highly recommend it.
This book is more than a decade old but still very useful. The author argues that one needs to look at investing in assets on a 20 year cycle. He is also skeptical of other types of assets (for example he presents data that the compound rate of growth in housing prices between 1963 and 2003 is 1.55% in real returns (the rate of growth less inflation). Over the same time the S&P return was more than four times that. But all 20 year periods are not the same. He then goes on to argue that the most effective strategy for buying equities is to look to non-growth stocks and smaller companies (Dreman made a similar argument in his book). He also emphasizes that because of a lot of factors financial markets revert to the mean - based on things like valuations and demographic factors. He is a fan of small cap stocks ($200 million to $2 billion in assets).
While they may have a place in any portfolio - debt equities are, based on real returns, pretty crappy investments. Treasuries between the 1930s and the 1980s lost 3¢ on the dollar - T-bills(supposedly the safest investment) lost 18¢.
He then goes through a series of alternative portfolios. Think of a matrix - Large and Small Cap on the Vertical part and Small Cap, Mid Cap, Large Cap on the horizontal axis. He presents some speculation on what each of those portfolios will return over the next 20 years (through 2025).
He also does a chapter on demographics in which he divides the boomers into two groups 1946-54 and 54-64. He comments " two subgroups have very little in common, possess very different attitudes about life and work, and have very different ideas about how to achieve what they want in life." He is not optimistic about investment returns for the next 20 years in part because many of my generation will be drifting into retirement. (For many reasons some of those ideas have been postponed but are not inaccurate).
One other comment, he seems to suggest and I agree that hiring a competent investment manager may well be worth the risk. Warren Buffett (in 1987 I bought one share of Berkshire A for under $4000) had two good quotes about investment - the ideal horizon for an investment is a lifetime. (I violated his dicta and sold my one share several years ago for a lot of different reasons). And in one of his annual reports he told of Mr. Market - a strange person who gets up each morning and reacts irrationally to what is happening - so on some days he is overly exuberant and others overly pessimistic - a good reason not to buy stocks based on fashion. An investment manager can tame Mr. Market in each of us!
There are some burps in his prognostication (besides the projections on returns between 2005-and 2020). For example, he highlights PG&E as a sound company. That may have been true based on numbers at one time - but no more. But the over all thinking in the book is worth spending some time with.
O'Shaughnessy's book is a quick read. But it is well worth the time. I highly recommend it.
Displaying 1 - 5 of 5 reviews