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Bob:
Great post. I think another potential clink in the buy and hold armor
is that companies that comprise the indexes have been constantly
replaced over the years. In order to mimick the buy and hold returns it
would appear that investors not only have to get rid of their losers but
also avoid the replacements suggesting at least an application of
asset allocation strategies.
Charles
-----Original Message-----
From: Bob Fulks <bfulks@xxxxxxxxxxxx>
To: Tom Alexander <gta3@xxxxxxxxxxxxx>; Zaheer Bhyat <Zaheer@xxxxxxxxx>
Cc: RealTraders Discussion Group <realtraders@xxxxxxxxxxxx>
Date: Monday, October 04, 1999 8:37 AM
Subject: Re: Stop me before I day Trade again!
>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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