Boring but Successful:

Boring but successful: How an accountant's strategy can help you beat the market

If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."

- Billionaire hedge fund manager George Soros

Which companies have the flashiest products? Which hedge fund managers have amassed the greatest fortune and the biggest homes? Which stocks have the most explosive earnings growth? Most investors thirst for juicy, exciting storylines like these, and the media are only too glad to accommodate them.

But George Soros is right: In stock investing, the road to success is usually not paved in gold, but instead in good ol' boring concrete.

There may be no better example of that than Joseph Piotroski, who showed that investors can handily beat the market by using the tools of a profession whose dullness often makes it the butt of jokes: Accounting.

In 2000, while an accounting professor at the University of Chicago Booth School of Business, Mr. Piotroski authored a paper entitled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." The paper focused on stocks with high book/market ratios (the inverse of the price/book ratio), which was not in and of itself groundbreaking.

But Mr. Piotroski used his accounting background to go an important step further. He realized that some high book/market stocks might be inexpensive for good reason: They were in financial distress. So he ran high book/market stocks (those in the market's top 20 per cent) through a variety of accounting-type tests to make sure they were on solid financial footing. Mr. Piotroski showed that from 1976 through 1996, a portfolio that was long high book/market stocks that passed his tests, and short those that didn't, would have produced a 23-per-cent annualized return - more than double the S&P 500's return over that span.

What accounting tests did Mr. Piotroski use? He wanted a firm's return...