Beating Buy and Hold

Originally posted by max401
I guess what I am thinking is that a retirement account could be traded (with moderation) and perhaps produce a good result.
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I would tend to agree but consider the case of an investor who, at age 30, dumps some cash into an index fund (mutual or ETF, whatever) and continues to add, on a yearly (or perhaps quarterly or monthly) basis, roughly the same (inflation-adjusted) amount to the original investment. At age 65, the investor begins to withdraw an equal amount based on his life expectancy. Considering this guy has been buying over an extended period and will withdraw roughly equal amounts over perhaps the next fifteen years, his overall return has got to be tough to beat. Now that's nothing more than buy and hold, right (albeit a DCA-type variant)?

Someone mentioned earlier in the thread that it took 26 years before the DJIA returned to its peak in 1929. True, of course, but had the hypothetical investor (above) begun the aforementioned approach right at the 1929 peak, by circa 1954, his =average= cost would have been in the 190 range and by the end of 1955 the DJIA was approaching 500. The investor would have begun withdrawing in 1964 when the DJIA was close to 900. Maybe my math is whacked but I get a return in excess of 13% per annum out of those facts and that would be exclusive of dividends.
 
you said:

"begun the aforementioned approach right at the 1929 peak, by circa 1954, his =average= cost would have been in the 190 range and by the end of 1955 the DJIA was approaching 500. The investor would have begun withdrawing in 1964 when the DJIA was close to 900."


first, what the price of one bottle of milk in 1929 and 1966?

second, $10000 in 1929, buy bonds, 5% interest, how much from 1929 to 1966.
 
Originally posted by steet010203
first, what the price of one bottle of milk in 1929 and 1966?

second, $10000 in 1929, buy bonds, 5% interest, how much from 1929 to 1966.
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First, you explicitly added inflation to the matrix. Second, you implicity added taxes since bonds generate current income (as opposed to cap gains where taxes can be, at least, deferred).

Simply put, only stocks have outpaced both inflation and taxes over the past 75+ years. Debt instruments, of any kind, have not even come close.
 
Originally posted by max401


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*I would imagine any portfolio manager watches over his picks on a daily basis.
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Yes, they probably do. And any investor should watch his/her portfolio at least weekly, monthly etc.

But when do you decide to dump a stock? Only when it shows clear signs of weakness, when there are unexpected bad news or the like. But then you have already given up a bit of performance, either you have lost some profits or you have a real loss. And in the case of unexpected bad news the market reacts very fast, how long did it take Enron to nosedive?

Selling a good stock when it is still rising? Only to see it double and triple after you sold (with a good profit)?

Remember that most mutual funds do not beat their benchmark index in spite of whatever their managers do. This ist not entirely due to their inability (maybe not at all) but simply a result of the large number of mutual funds: their trading/investing accounts for a large part of the market (not necessarily on a daily bases) so how can they all beat the market? It is simply impossible. I'm afraid the same logic applies to the individual investor.

As to the book of James O'Shaughnessy: he tested a portfolio of 50 stocks and revaluated that portfolio on a yearly bases. This is hardly possible for the individual investor, if I had the money to invest in 50 stocks (in a resonable size, that is, not in 1-Stock sizes) I probable would not invest any more... Even with this strategy there was a period of abot 10 years when it underperformed. Come on: you see your strategy underperform 1 year, 2 years, 3 years, 4 years in a row.... still sticking with it? This strategy is as curve-fitted as any other.

As to the long-term performance of stocks: I simply doubt that it is really that good (I do not want to say bonds are any better, bonds do have their problems too) and that is because of the afore-mentioned survivorship bias. You would need a really good long term database to check that.

A nice book about life and markets, mentioned in some other threads already: "Fooled by randomness" by Nassim Taleb.

(I do not think the markets are random.)

regards

Bernd Kuerbs
 
" [New Post] 02-17-02 05:10 AM

quote:Originally posted by steet010203

first, what the price of one bottle of milk in 1929 and 1966?
Roughly, a 1929 dollar in 2002 buys $.095 worth of goods; in 1966, $.18

A 2002 dollar in 1929 is worth $10.56 and in 1966 $5.57.

http://minneapolisfed.org/economy/calc/cpihome.html"

i check the site:

i got:



If in 1929 (year) I bought goods or services for $, 1.00
in 1966 (year) the same goods or services would cost $ 1.89



If in 1929 (year) I bought goods or services for $, 1.00
in 2002 (year) the same goods or services would cost $ 10.56,


maybe a little clear
 
Originally posted by steet010203
" [New Post] 02-17-02 05:10 AM

quote:Originally posted by steet010203

If in 1929 (year) I bought goods or services for $, 1.00
in 1966 (year) the same goods or services would cost $ 1.89
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I think that is less clear. The best reference point is the current dollar. I can relate a Y2K+ dollar to 1929 or 1966, but not a 1929 dollar to a 1966 dollar.
 
Originally posted by BKuerbs
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.
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Just in the FWIW department, the following is a list of companies that were in the DJ30 near the end of 1928:

Allied Chemical & Dye (Allied Signal ---> merged with Honeywell)
American Can (Primerica ---> acquired by Citigroup)
American Smelting (Asarco ---> acquired by Grupo Mexico)
American Sugar Refining (Tate & Lyle North American Sugars)
American Tobacco (BTI)
Atlantic Refining (Arco ---> acquired by BP)
Bethlehem Steel (BS)
Chrysler (DCX)
General Electric (GE)
General Motors (GM)
General Railway (SPW)
B.F. Goodrich (GR)
International Harvester (NAV)
International Nickel (N)
Mack Trucks (Renault)
Nash Motors (AMC ---> bought by Chrysler)
North American Co. (electric utility....?)
Paramount Publix (Paramount Pictures ---> acquired by Viacom)
Postum Cereal foods (General Foods ---> acquired by MO)
Radio Corp. (RCA ---> sold to GE then to Thomson Multimedia)
Sears, Roebuck (S)
Standard Oil (XOM)
Texas Co. (CVX)
Texas Gulf Sulphur (did Enron execs learn nothing here?)
Union Carbide & Carbon (merged with DOW)
U.S. Steel (MRO)
Victor Talking Machine (bought by RCA)
Westinghouse Electric (CBS ---> bought by Viacom)
F.W. Woolworth retail (Z)
Wright Aeronautical (CW)
 
@Optrader

I thought I got my information from the pages of www.dowjones.com. I tried to look them up again, but they have redesigned their pages since I last visited them. I can only find the composition of the original 12-stock Dow. Downloading the historical composition of the index in 1928 did not work. Do you have any other source of information?

regards

Bernd Kuerbs
 
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