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At 9:12 AM +0200 10/4/99, Zaheer Bhyat wrote:
>Is the officially prescribed slant of Wall Street in favor of
>buy-and-hold-forever anything other than self-serving? Isn't it Big
>Money which is really responsible for the gazillions of shares traded
>every day and all the volatility?
At 7:12 AM -0400 10/4/99, Tom Alexander wrote:
>While buy and hold may not work forever, one has to admit when it
>comes to US equities and a reasonably diverse portfolio it always has
>- so far.
This is a common misconception. The upward sloping curve of the stock
indices makes it look as if Buy/Hold always works. What is not
generally recognized is that much of this growth has been due to
inflation.
The attached GIF ("AdjDJIA.gif") shows that over most of the past
century, the DJIA, adjusted for inflation, has been pretty flat. The
buying power of your holdings in 1980 would have been the same as it
was in 1915. Note that if you happened to buy-in to this game in
either 1928 or 1965, you lost over 70% of your buying power in the
following bear market and it took 29 years for you to get back to
where you started.
The past 20 years has been an exception, The second gif
("DJIA0999.gif") shows this period in more detail. Note that the
baseline has increased at a 12% rate. There have been shorter-term
increases at higher rates, always followed by a drop back to the 12%
baseline.
The trend over the past five years has been at a 24% rate. History
would indicate that a drop back to the 12% line is overdue (but we
will see). The trend in earnings of the S&P500 stocks has continued
to increase at only about 7% per year for most of the century,
including the past 20 years. So this faster increase in the prices
shows up as a continuous increase in the PE ratio of the markets to
their present historic highs.
But even in this exceptional past five years, the Sharpe Ratio of a
Buy/Hold strategy over these five years has only been about 1.0,
which is significantly poorer than the Sharpe Ratio of almost any
decent market timing system. Many of the market-timer money managers
have shown a Sharpe Ratio of over 3.0 over recent years. Their
absolute level of return may have lagged the market but with a high
Sharpe Ratio, you can safely use leverage to increase the returns to
much higher levels than the 24% of the market trend line.
I would venture that "the establishment" wants "the public" to stay
with Buy/Hold since market timing only works if a small percentage of
people do it. When the market timer sells, there has to be somebody
there to buy...
Bob Fulks
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