Alpha Trader #7 - The last sustainable edge: Talking with Jim O'Shaughnessy

The seventh episode of Alpha Trader features Jim O'Shaughnessy, who helms O'Shaughnessy Asset Management, and is the author of several book on the market, including the seminal What Works on Wall Street. "Arbitraging human nature is the last sustainable edge," says O'Shaughnessy when asked if "what worked" when that book was published (1997) still works today. In other words, yes, systematic and rules-based strategies still have a place for investors looking for alpha. Passive investors, suggests O'Shaughnessy have one point of failure - things are cruising along, the market drops 20%, they start reading the headlines, panic, and sell ... often at the bottom. Active investors have an additional point of failure - that they will abandon a possibly successful, but underperforming strategy at just the wrong time. Turning to the more practical, O'Shaughnessy talks about one favored strategy, and that's buybacks. It's underperformed of late, but the data going a long way back is pretty definitive - companies that are active in returning cash to shareholders do significantly better over time than those who spend the money otherwise. To be more specific, large-cap companies that are cheap, operate with low leverage, and are high-conviction in their buybacks (5% or more of the float) are the ones you want to look for. Prior to chatting with O'Shaughnessy, Task and Alpher get ready for Black Friday by looking at some recent retailer earnings - in particular strong numbers from Walmart (WMT) and Target (TGT). Results and the 2019 price charts (up and to the right) suggest the consumer is doing just fine and both companies have successfully navigated the China tariffs. The hosts also consider the rise in animal spirits as evidenced by what's quickly become a sizable wave in M&A activity. It might prove to be a harbinger of a Santa Claus rally as investors place bets on who's next to be taken over.