How to Retire Rich

Rating:
Summary: Reasonable Runaways performance update...
Review: A truly amazing strategy. I recently concluded tracking a 25-stock Reasonable Runaways strategy and the results are eye-popping. The portfolio turned in a 77.81% return dating from November 8th, 2002 thru November 7th, 2003. I will be putting real money to work now that I was able to see it with my own eyes...

Rating:
Summary: Good, but...
Review: I first read this book about 2 years ago and decided to put the Rational Runaways strategy to the test. After about three months, most of the stocks were up and the portfolio as a whole was up about 15%. Then, one by one, the majority of the stocks faded, then crashed. After a year, I was down about 15%. I decided to combine O'Shaugnessy's strategy with William O'Neill's, plus the considerable information available from Technical Analysis of Stock Trends, by Edwards and Magee. I pick stocks that meet O'Shaugnessy's criteria, that are also in solid uptrends. I sell them when they begin to trend down. Half of my stocks have gone up, half down. I've sold the losers for an average loss of 10%, the winners for an average gain of 25%. My average holding time is 3 months. I've been doing a bit better than 30% per year, and these are not net stocks or dot.coms. These are companies with real and growing earnings, reasonable pe ratios and low ps ratios. It's easy to mistake a bull market for genius, but so far, I believe I've found a strategy that will do well in any market environment.

Rating:
Summary: Reasonable Runaways is a winner!
Review: I purchased this book in November of 2002 and subsequently have been tracking a 25-stock reasonable runaways portfolio since November 8th. To date, the portfolio is up 28.65 percent before commissions! Utilizing a Scottrade account at $7 per trade, you would subtract 1.75 percent from that current return. Still 26.90 percent is nothing to sneeze about. If you are under 40, this should constitute a core holding at a minimum in your tax-deferred or Roth IRA account. Good luck to all!

Rating:
Summary: Recommended
Review: In Edward Lear�fs satirical poem, �gThe Blind Men and the Elephant�h, a group of blind men who are completely unfamiliar with elephants happen upon one by chance. They try to describe its shape by standing around it and blindly groping one body part each-- one man feels the animal�fs leg, another the trunk, another the tusk, and so on. None of the men comes close to describing the complete elephant, and each man argues with the others over what an elephant really looks like.

I have been investing for nearly a decade, have read a couple dozen books on the subject, and have found the authors to be a lot like Lear�fs blind men. Each author manages to accurately describe one particular aspect of investing, or makes one or two good points, but no one gets the whole picture.

The lone exception is James O�fShaughnessy writing in _How to Retire Rich_. HTRR not only perfectly describes the entire elephant, it tells you how to ride it, and why you should be riding it. Unlike almost every other book on investing, the instructions are clear, simple and specific. There are no generalities such as �gBuy what you know�h. (This suggestion comes from authors such as Peter Lynch, and frankly I find it ridiculous-- if the reader of an investment book _knew_ anything, they wouldn�ft need the book.) O�fShaughnessy guides you step-by-step through his strategies (you can choose from among five), telling you exactly how to find the individual stocks to buy, how many to buy, and how long to hold them for. There is no fancy footwork involved. Working any of his strategies requires about 90 seconds�f worth of effort per year and a grade-school education. He corroborates his strategies with 45 years�f worth of back-tested data, as far as I know, the only author to provide such extensive proof. This proof is key since, as he shows, �gAnything can work for 5 or even 10 years.�h While these features alone would set HTRR above possibly every other investment book out there, what is really impressive about HTRR is O�fShaughnessy�fs treatment of the �ebigger picture�f-- the psychological aspects of investing. This �ebigger picture�f information is not the sort of empty pep talk you get in the likes of _Rich Dad, Poor Dad_, but sound advice that can change the way you look at investing. The author has obviously done a lot of thinking about investing psychology, and has developed a very mature, sophisticated outlook, which comes through in countless nuggets of wisdom throughout the book. Put all these elements together and what you have is nothing short of revolutionary.

I have now just begun Year 3 of my Reasonable Runaways portfolio. (Reasonable Runaways is one of the book�fs strategies.) Taken out of context, its returns for Year 1 and Year 2 haven�ft been spectacular-- +8.0% and +6.5% respectively. But considering the returns for the S&P 500 in the same time period (-24.2% and +11.0%), it�fs doing extremely well. As HTRR emphasizes, the ultimate goal is not to get returns of X% every year-- it�fs to beat the returns of the market, thereby beating the returns of 80% of all the mutual funds available. And let�fs not forget that figures on returns of mutual funds are generally available only for the past decade or so, so ultimately, it�fs very likely that the book�fs strategies will wind up beating ALL mutual funds over time.

I�fm baffled by many of the Amazon reader comments on _How to Retire Rich_, since many people write as if they hadn�ft read the book. One reader complains, �gAfter about three months... the portfolio as a whole was up about 15%. [But] after a year I was down about 15%.�h Several times O�fShaughnessy states that the return for a single year is meaningless. Even 5 years�f worth of returns could very well be meaningless. He backs these claims up with examples and figures. Looking at the performance tables in the back of the book is extremely helpful in seeing what he�fs talking about here. The same reader goes on to write that he decided to combine Reasonable Runaways with other strategies and an average holding time of 3 months, and crows of his 30% return after one year. I can�ft help wondering what he will do when his house of cards comes tumbling down. The problem with going off on your own tangent is that you no longer have 45 years�f worth of data showing you what to do. The nuggets of wisdom and big-picture perspective of HTRR help you avoid making mistakes like this.

Similarly, another reader complains that O�fShaughnessy�fs mutual funds �gfailed miserably�h in matching the S&P over two years. Again, I�fm amazed this reader could have actually read the book. Take a look at the performance tables in back. Two years�f worth of returns are meaningless.

One reader writes, �gI don�ft know how reasonable/practical it is to follow 50 individual stocks. I can barely keep up with 10.�h There is no need to �gfollow�h (whatever that means) the stocks. You buy them and forget about them. A year later you sell them and repeat the process.

One reader states, �gIf you look at his numbers AND factor in costs of establishing a similar group of stocks (something he neglects to do), the S&P is the clear winner.�h As O�fShaughnessy mentions, the strategies in HTRR would not have been possible just a few years ago, before the advent of deep-discount Internet brokers. The only way to effectively employ them is by using Internet brokers and paying around $10 per trade. For a 50-stock portfolio and $10 trades, the trading costs per year are $1,000. For a 25-stock portfolio, half that. How much this cost will eat into profits will depend on the size of the portfolio. A $10,000 50-stock portfolio wouldn�ft be feasible as trading costs would be 10%. For a $100,000 portfolio, trading costs are only 1%, well within the realm of possibility. O�fShaughnessy started his mutual funds to give small investors the opportunity to mirror his strategies without having to pay excessive trading costs.

One reader had a legitimate question about the Leaders With Luster strategy, asking whether the correct criterion is annual sales of at least 50% more than the average company or merely annual sales more than the average company. In my opinion it�fs the former, and the section stating the latter is merely an oversight that should have been caught in editing. I base this opinion on another of O�fShaughnessy�fs books, _What Works on Wall Street_, where Leaders With Luster (under another name) is outlined and uses the �e50% more�f criterion. I think anyone considering actually doing any of the strategies in HTRR should also read _What Works on Wall Street_ for a little more in-depth information.

One reader complained about the presentation of two different versions of Reasonable Runaways in WWOWS, with only one version given in HTRR. It seems obvious to me that O�fShaughnessy feels either version will work about the same. He writes (on p. 298 in WWOWS), �gSince they are so similar, I expect these strategies to continue to run neck and neck in future.�h

A number of readers have scoffed that HTRR is more suited to the novice investor than the experienced investor. I suspect these commentators are themselves novices without realizing it. It�fs a little like the story of the disgruntled teacher passed over for promotion by a junior colleague. �gI have 16 years of experience,�h he objects to the school principal. �gNo you don�ft,�h replies the principal, �gYou have one year of experience repeated 16 times.�h O�fShaughnessy makes a similar point on p. 181 in his (granted, slightly hokey) Zen tale about a fish that can�ft understand the concept of water. �gIt is so much a part of you that you are unaware of it,�h replies the fish�fs father. So too with investors who are so ingrained to think that investing is all about outsmarting, outguessing and outmaneuvering the other guy that they don�ft realize this philosophy is like the �ewater�f they have lived in all their lives and never noticed.

One reader warns urgently that not using stop-limit orders is very risky. This might be true for day-trading or for highly-volatile thinly-traded companies, neither of which applies to the strategies in the book. There is no need to limit losses with stop-limit orders using any of HTRR�fs strategies. Yes, at some time or another, you will get individual stocks that tank. I had one company go out of business entirely, the price falling to zero. But who cares? With a 25- or 50-stock portfolio held and rebalanced annually, disasters like that all come out in the wash over any reasonable length of time, balanced out by companies that double or triple in value. However, one point that anyone using the HTRR strategies should note is not to include OTC (pink sheet) stocks in the portfolio. I noticed some stock screening sites don�ft include them and some do. Apparently the Compustat database that O�fShaughnessy used doesn�ft include them, as he would undoubtedly have mentioned them. What he says of microcap stocks is also true for OTC stocks-- their returns are chimerical, no-one can buy or sell them at the price they are supposedly going for. The Multex Investor screening site I have used so far includes OTC stocks, but includes a feature for easily removing them. It merely adds a step to the screen.

While on the subject, one reader complains that the free info on the Web is gone. As of right now, August 2003, that just isn�ft true. I use the Multex Investor site, completely free. I also checked out the MSN screening site, also completely free, to have another source of information to compare/contrast. (Admittedly, there seem to be few sites out there capable of running the required screens. Many, such as the Yahoo screening site, are laughably primitive.) The results of these two sites are always slightly different, due to differences in when the information is updated and slightly different criteria used for price momentum change over the past year.

One reader complains that Reasonable Runaways and Leaders With Luster are difficult to understand. Frankly, I don�ft see how the strategies and the book could be any simpler than they are.

There are times when it is tempting to go off tangents, and fiddle around with HTRR�fs strategies (Reasonable Runaways in my case). That�fs why HTRR�fs nuggets of wisdom and 45 years�f worth of back-tested data are so helpful.

Lest anyone think I am a hired shill, let me close by saying what I dislike about HTRR. As I mentioned, I think anyone considering actually doing any of the strategies in HTRR should also read _What Works on Wall Street_. Reading HTRR before reading WWOWS (as I did), HTRR seems to present an arbitrary collection of strategies out of thin air, with no explanation of how they were decided on, or why these particular strategies should work better than any other strategies. HTRR needs to provide a bit more background information. WWOWS fills in some of the lack, but more information is needed. For example, how did O�fShaughnessy come to be the �gfirst researcher allowed into Compustat�fs database�h? Another quibble is technical-- O�fShaughnessy doesn�ft address the issue of how, over the many years into the future that readers are supposed to work Reasonable Runaways, they should adjust the market capitalization figure of $150 million he gives. This point is addressed in WWOWS, where he says the figure was depreciated to account for �ginflation�h every five years. If we are to understand that he used general price inflation and not stock market growth as the index for depreciation, his relative market capitalizations are going to be skewed significantly higher back in the early years of the back-tested data. To me, that seems a pretty glaring error, although obviously I don�ft think it invalidates his basic premises.

Rating:
Summary: Read What Works on Wall Street instead
Review: In this book Mr. O'Shaughnessy takes four different (fictional) characters and shows them how to use his investing methods to beat the market based on his exhaustive study on what really beats the market. Basically this book takes his knowledge from What Works on Wall Street and makes up stories for these couples.

Mr. O'Shaughnessy thinks we should buy 50 stocks and rebalance those 50 stocks at the beginning of each year. In fact I am surprised that I haven't seen FolioFN giving away his books to their members since his methodology seems to be meant for those of us who have folios.

One of the major things that I didn't like about this book was in his descriptions of how these couples could retire rich he basically cut and paste each one and changed the ending result, in my opinion he made this book very boring and is a waste of paper. The only part of this book I liked was pages 139 and 140 these pages have various "doom and gloom" headlines from 1951-1997 and show that the market always has recovered.

Since now the strategies in this book are out in the public they probably won't even work right, so I would advise the majority of investors to put their money in an S&P 500 index fund since you'd be beating 80% of fund manages without having to do any research.

Reed Floren

Rating:
Summary: Don't use the formulas--unless you want to get rich!
Review: Jim O'Shaughnessey founded the Cornerstone Growth mutual fund. Subsequently, it was sold to Hennessey Funds and is going strong under new manager Neil Hennessey. The fund is strictly managed according to the "reasonable runaway" formula set forth in the book. For 2001, it gained over 12%, beating the S&P by more than 24%. It is now up approximately 8% for 2002. Morningstar now rates the fund 5-star. (I have no connection with O'Shaughnessy or Hennessey other than investing with them.) It is also easy to run the formulas, and buy the stocks online yourself. It just makes sense--buying value stocks which have appreciated over the past year. Jim's research shows that these stocks will continue to appreciate. Value + momentum = profits. The formula predicts 17% average gains over time and in fact the strategy has earned about 16.9% over the last 5 years, with no significant help from the tech runup. Run the numbers for yourself--17% will make you rich pretty darn fast. Highly recommended reading, and unique among the stock market books I've read for actually making sense and working.