TIGER 21

Bear Stearns Market Guru James O’Shaughnessy to TIGER 21: Look at Small and Midsize Companies and Large Cap Value Stocks for Current 20-Year Cycle

New York –With more than $7 billion in investable assets among the members of high net worth group TIGER 21, many of Wall Street’s best and brightest have jumped at the chance to present at one of its meetings. Of those, a select few have been invited back. James O’Shaughnessy is among those that have made such an impression on TIGER 21 members to merit a return visit. It is no wonder, considering his reputation as a pioneer in the industry and being featured along with such luminaries as Benjamin Graham, Peter Lynch and Warren Buffett in the book The Market Gurus: Stock Investing Strategies You Can Use from Wall Street’s Best.

 

Mr. O’Shaughnessy’s current focus on long-term investment strategy agrees with the general philosophy of most TIGER 21 members, who are more interested in wealth preservation over wealth creation. In general, TIGER 21 members favor investments that have a long investment horizon and a low risk profile. Mr. O’Shaughnessy formulated his strategy following many years of studying the markets and trail blazing work in quantitative equity analysis. Now the Director of Systematic Equity for Bear Stearns Asset Management, the best-selling author outlines his investment premise in a new book: Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years.

 

According to Mr. O’Shaughnessy, the year 2000 marked the end of a twenty-year cycle that was dominated by the stocks of larger, faster growing 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.  

 

“If you look at very short periods of time, what you see is meaningless noise. One five-year period would show small stocks performing well, another would show large-cap growth stocks on fire, a third might recommend value. When looking at the fullness of time, however, you see that certain types of stocks perform vastly better than others – and that there was a good reason for their superior performance,” says Mr. O’Shaughnessy.

 

Mr. O’Shaughnessy is a staunch advocate of taking an empirical approach to investing. At the core of his philosophy is that human emotion pollutes the investment decision making process and by removing emotion investors can give themselves a better chance to out-perform the market.

 

“Markets look like they are priced by humans, and between the numbers and my opinion, I’ll take the numbers,” he says. “For instance, many investors learned a lesson from the bubble bursting after the run-up in the stock market culminating in 2000. But they have not necessarily put those lessons to the true test so that their future investments truly perform well.”

 

He concedes that investing is a lifelong leaning process and the market can teach lesson after lesson – many of which take time to sink in. TIGER 21 members can relate to this – having joined the learning group to exchange ideas and share personal investing and wealth management experiences.

 

Mr. O’Shaughnessy also says investors should re-balance their portfolio every year – another suggestion that fits right in line with what most TIGER 21 members are already doing. In fact a recent survey of members found that a majority of members review their portfolio allocations at least once a year.

 

Looking at the current 20-year cycle, Mr. O’Shaughnessy says:

 

  • The rational investor will not have anything in long term growth stocks. In fact, the typical investor today is over invested in large cap growth stocks and underinvested in mid- and small-cap stocks. 
  • Moving forward the S&P 500 will be the slow rabbit, returning only between 3 percent and 5 percent annually over the next 20 years. 
  • Small-cap stocks, which began a rally in 2000, will continue to do significantly better than large-cap stocks over the next ten to fifteen years. 
  • Large-cap value will outperform large-cap growth. 
  • Looking at allocation investors should have their portfolio in: 50 percent large-cap value, 35 percent small-cap, 15 percent large-cap growth. 
  • Investors should be bearish on corporate bonds and avoid long-term bonds in this current 20-year cycle. Shorter-term and inflation-protected bonds are a better choice.  
  • Investors with the capacity to invest in alternative investments, such as hedge funds, should seriously consider doing so.