Beating Buy and Hold

jj_jere@hotmail · Feb 12, 2002

I spent a little time looking at the idea of buying an index in Nov and selling in May. It looked pretty impressive in my last post. I went back to 1928 with the DJI and it has worked very well since 1952. But prior to 1952 you whould have been better off doing just the opposite. Strange; about 24 straight years going one direction and then 50 years going the other.
Also the different indexs have different sell dates. True, that the ideal Buy date whould be on the close of Oct 27th. The best sell dates are April 27th for the DJI, June 6th for the SPX and July 15th for the NDX.
JJ

jj_jere@hotmail · Feb 16, 2002

I've found two other methods to beat "buy and hold":
1. Hold the QQQ or SPY until the two week Volitility is greater than the average then switch to bonds and wait for the volitility to revert back below the average. You whould have missed all the big bear markets and the bonds whould have gone up in value.
2. Buy at the opening of the 28th of the month and sell on the 7th of the next month. Most all of the gains of the index have occured during this time period.
JJ

BKuerbs · Feb 16, 2002

Originally posted by Private
As for Buy & Hold, here is a new story: Buy and Hold Strategy Loses Favor The story ends with an interesting example showing how indexing underperforms investing in the right large caps.

Originally posted by max401
The main reason it works, particularly if you buy and just let it lay there for a decade or three, is splits. Plenty of inheritors are sitting on tens of thousands of shares of GE with a cost of $1.05 per.

I recommend to be very very mistrustful towards these tests, they probably contain an error that is called "Survivorship bias" in statistics.

What it means? People test a universe of stocks that exists (still exists) at the time they perform their test, they forget to include all those stocks/funds that existed 20/10 years ago, when their tests start, and that have gone out of business. When you are an investor those 20/10 years ago you certainly would have considered investing in these stocks and certainly have done so in some cases. Read the story Private has given the link to, especially the paragraph about the nifty fifty.

The DJ30 is composed of 30 stocks, there is one stock in it since 1928: GE, all the others have been replaced. And most of the steel and railroad companies have gone out of business. Same applies to the SP500: between 1986 and 1996 100 companies have been replaced in this index. There are some reasons for a company being thrown out of an index, one of them is going bankrupt.

Same applies to mutual funds. Funds that do not perform well are closed, merged into other funds of the same company etc. A fact that is not taken into account in their glossy brochures.Search the internet for "Survivorship bias" and you will find some interesting articles, especially with regard to the performance of mutual funds and hedge funds.

Regards

Bernd Kuerbs

Private · Feb 16, 2002

I might add here that about a year ago John Bogle, the father of the index fund, appeared on CNBC with some interesting commentary. One of the first things he said was, "Now is not the time to be getting in an index fund." Isn't that odd? It should really tell you something when indexing's major proponent knows the stock market is about to take a dive so you should expect your investment to be worth less in a few months.

And down it went indeed. It has remained range bound ever since--unless it is soon to move lower again. The current focus is on earnings recovery, which is different from economic recovery. All these accounting tricks of laying off employees, cutting advertising costs, and shutting down production facilities mean bad times ahead for the long term investor. Hold on to your cash and check again in a year. If things look safe at that time, then you can spend all you want.

ShoeshineBoy · Feb 16, 2002

James O Shaunessey's What Works on Wall Street. He researched fundamental analysis (P/S ratios, etc.) on 40 yrs of stock prices to find what beat the SnP (but only by a 3-10 points). Odds are it will work in the next 40 years.

ShoeshineBoy · Feb 16, 2002

But this is only for a pool of stocks not an index, etc.

max401 · Feb 16, 2002

Originally posted by BKuerbs

I recommend to be very very mistrustful towards these tests, they probably contain an error that is called "Survivorship bias" in statistics.

There are some reasons for a company being thrown out of an index, one of them is going bankrupt.

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Yes, but that type of investing would be "buy and forget," not buy and hold. If one is going to put money in a very long term hold it would be prudent to look in upon it once in a while* and thereby prevent being married to it "until death do us part."

*I would imagine any portfolio manager watches over his picks on a daily basis.

ShoeshineBoy · Feb 16, 2002

Good point! I'd never thought about a "survivorship bias". However, I would think that with just a few minimal QA screens you could weed out the tankers and perform just as well.

Optrader · Feb 16, 2002

Originally posted by max401
I would imagine any portfolio manager watches over his picks on a daily basis.

As would I. However, I have to wonder how significant that is considering the vast majority can't seem to beat the relevant benchmark.

max401 · Feb 16, 2002

Originally posted by max401
I would imagine any portfolio manager watches over his picks on a daily basis.
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Originally posted by Optrader

As would I. However, I have to wonder how significant that is considering the vast majority can't seem to beat the relevant benchmark.

True enough, however, those benchmarks are usually short term; a long term buy/hold would be decades, if you're young enough.

If any of the savy investor/traders on this board were to run their retirement portfolio, one would hope for a better result by daily/weekly/monthly tuning.

Back to the GE example, I doubt if any pro managers dumped GE when it began to fall recently. Mindful that hindsight is 20/20, I think I would have been inclined to sell some at that time and leave it in cash. When it dropped to high 20's, well, need I say more, GE anywhere in the 20's? I guess what I am thinking is that a retirement account could be traded (with moderation) and perhaps produce a good result.