Historical Testing of
V: Using Buy and Hold
with Real S&P 500
K. Tharp, Ph.D.
In Part IV of this
series, we looked at what would happen if we bought $200 worth of
each of the S&P 500 stocks on April 2005 on October 3, 1980 or
when the stock was first issued, whichever came first.
We did not sell any of the stocks.
We did historical testing of an efficiency signal on
today’s S&P 500 data going back to the year 1980.
We sold everything on April 4, 2005, which is when our
database ended. Our
initial $100,000 in equity became $3,025,960
while paying $31,356 in commissions.
Our gain amounted to a compounded return of 14.89%.
we are going to compare buying and holding two databases.
We have an accurate S&P 500 database (i.e., it is split
and dividend adjusted), which only has stocks while they are a
member of the S&P 500. In
other words, it drops stocks when they are dropped from the S&P
500 and it adds them when they are added to the S&P500.
Thus, Microsoft doesn’t become part of our database until
July 1, 1994 rather than its first publicly traded date of March
17, 1986. And Dell
isn’t included until October 1, 1996 rather than its first publicly
traded date of June 24, 1988.
In the previous
article (Part IV), Dell produced a huge R-multiple of 1700R,
whereas, in the new study it is reduced to 711.6R (where 1R is
assumed to be our entire up front investment of $200).
our database does not begin until February 1, 1990, so we are
missing ten years of data. As
a result, we decided to repeat the study with the April 2005 S&P
500 database beginning on February 1st and then compare
that with the accurate S&P 500 data.
Thus, the data for both databases will begin on Feb 1, 1990
and end on April 20, 2005.
I: Buying and Holding
the April 2005 S&P 500 (from 1990 or on the date when they first
came out as stocks)
our first study, we simply bought $200 worth of today’s S&P
500 in October 1980 or whenever they came out as stocks.
Thus, we were still purchasing $100,000 worth of stock, but
once we bought we didn’t sell unless 1) the stock stopped trading
or 2) the database ended on April 20, 2005.
Those were the only two exits.
Thus, this is a real buy and hold situation.
However, we are
basically buying the BEST American companies.
We were also buying them either on the start date or when
they first came out as stocks.
Part IV, we started with $100,000 and ended up with $3,025,960.
Our gain amounts to a compounded return of 14.89%.
We made money on 94.78% of our trades and the average
gain was 71.35 times the average loss.
only difference between the study reported in Part IV and this data
set is that we started later in this data set.
And the results show that when we start our buy and hold in
1990, our ending equity is $1,745,611.
This is about 1.3 million less than our prior ending
equity, but the average yearly compounded return on equity increased
from 14.89% to 20.66%. However,
the prior dates include the 1980-1982 bear market and the 1987
crash. Buying and
holding isn’t too profitable during such times even when you have
the best stocks in America. We
still had a drawdown of 48.6% on August 31, 2002 and we were still
in a drawdown when the data ended in April of 2005.
In this particular run we had 466 wins and 33 losses
for a 93.39% win rate. And
the average gain was 27.42 times bigger than our average loss.
1 shows the equity curve of buying and holding America’s top
stocks for 15 years.
1: Equity Curve over 15 Years
the results are great from 1990 through 1999, it’s also clear that
if you had bought everything in 2000, you still be down by 2005.
1 shows all of the stocks in the database with R-multiples of 30 or
more. And since our risk
was 100%, this means that they increase by 30 or more times our
original buy-price. This
occurred despite the price drop from 2000 through 2005.
Most of the stocks were purchased in 1990 with those
purchased later showing a shaded entry date.
DELL is still the top stock with an R-multiple gain of 711,
but that’s a significant drop from 1700 when we started in 1980.
|Table 1: Top Stocks from 1990
II: Buying and Holding
the Real S&P 500 Stocks (from 1990 until they were delisted or
until April 2005)
our second database, we will simply buy $200 worth of the real
S&P 500 stocks on February 1, 1990.
We will sell them when they are no longer part of the S&P
500 and buy new stocks when they become part of the S&P 500.
We will then sell everything at the end of our database in
April 2005 (we actually had the data through 2007 but cut it off so
as to compare both databases for the same time period).
2 shows the equity curve for this new database.
: Equity Curve of New Data
this database, our final equity was $771,198 for a 14.36% compounded
annual rate of return. This
is much less than the $1.7M and the 20.66% figures of the first
database. Also remember
that we were fully invested with the real S&P 500 database,
getting the 14% annual ROI, but
not fully invested until near the end with 2005’s S&P 500
database, yet still getting the 20.66% investment.
else that really stands out is that the drawdown during the
subsequent bear market is much less for the real database.
Compare the two figures.
The worst drawdown for the real S&P 500 was on October
11, 1990 at 21.95%, which certainly says we were not holding the
best performing stocks at that time.
And the longest drawdown is from September 1, 2000 to June
this database we took 858 trades and rejected 4 because of a lack of
money. We had 636
winners and 222 losers for a win rate of 74.13%.
Our average winner was 7.28 times our average loss.
Of the 858 trades, there were 139 with obsolete symbols
(i.e., the stock no longer exists) amounting to 16.2%.
Only 20 of the 139 lost money.
2 shows our summary returns to date with a beginning equity of
$100,000. Also, please
note that we were only fully invested from the very beginning in the
last study. All the rest
represented a gradual build-up of positions.
2: Summary Results to Date
||Annual % ROI
“Close – Close” Smoothing
(coding bugs fixed), starts in 1980
Starts in 1980
and Hold all Stocks from
1980 or Issue Date through 2005
and Hold all Stocks from
1990 or Issue Date through 2005
and Hold all Stocks from
1990 through 2005 – real S&P 500
In summary, the
efficiency with “close minus close” smoothing is clearly better than
buy and hold on the 2005 S&P 500 database.
And even the “close divided by close” smoothing is
similar in terms of returns but better in terms of drawdown,
suggesting that we could get much better performance with a position
sizing algorithm designed to meet whatever our objectives might be.
However, at this point
I’m not convinced that the efficiency trades that are being taken
automatically by the studies are adequate.
In addition, notice at this point I still have not made
position sizing adjustments to see what’s really possible with
this sort of trading. As
a result, there is still a lot more research that we’ll do in this
determine what happens when we allow ourselves to take as
many as 250 trades (i.e., half the S&P 500 database) at any one
time with the two smoothing functions.
With 1% risk and a 25% trailing stop we are limited to 25
trades. With a 0.1% risk
and a 25% trailing stop, we are limited to 250 trades.
We’ll simply increase our starting equity to $1M so that
we’ll be investing the same amount ($4000) with each trade.
As I’ve said, I’m not
convinced, given these results, that I’m really buying the stocks
I’d normally buy when looking at a chart.
As a result, I plan to look at charts of the 100 trades from
both smoothing algorithms to determine how many of them look like
“efficient” stocks. This
will give us a good idea to determine if we are looking at efficient
stocks or not. I still
have not had the time to do this, so if any of you would like to do
that and save me some time, I’d appreciate it.
Please let us know and we’ll send you the data.
We’ll also try other trend
following algorithms including 1) an 180 day channel breakout and 2)
linear regression to pick our trades.
All of that is still to
come in subsequent articles and it looks like this series might
continue for some time.
I think that Mechanica
is capable of really answering a number of significant questions
about comparing buy-and-hold versus various trend following.
We were fortunate enough to obtain an accurate 17 year
database of the S&P 500 that was adjusted for splits and
dividends and included numerous stocks that no longer exist.
However, our database was only 17 years (because it goes to
Sept 07). Since the
S&P 500 was created in 1957, we’d be interested in knowing if
anyone has an accurate database going back that far that we could
use or even knows where I might obtain one.
That is, you have prices (dividend and split adjusted) for
all stocks in the S&P 500 from 1957 through 2007 while they were
members of the S&P 500.
1. If you have some
interest in Mechanica, which we are using in these tests, then
go to the Mechanica web site --
Mechanica is the new windows version of Trading Recipes.
We originally showed the compounded annual return to be
33.3%. But when I was
looking for the data set to fill in the rest of this table, the
results were slightly different.
About Van Tharp: Trading
coach, and author, Dr. Van K. Tharp is widely recognized for his
best-selling book Trade Your Way to Financial Freedom and
his outstanding Peak Performance Home Study program - a highly
regarded classic that is suitable for all levels of traders and
investors. You can learn more about Van Tharp at www.iitm.com.
from My Own Mistakes
by D.R. Barton, Jr.
I recently had a trade where I messed
I find that I’m really good at
learning from mistakes that others make – and not so
good at learning from my own missteps.
This time was different.
I’ve been using a new strategy that
has me trade lower volume stocks than I normally use.
I scaled into a fairly large position (scaling in
means to start with a smaller amount and then add at
pre-determined points during the trade).
And the stock (which happened to be a short sale)
was moving nicely in my direction.
That’s when I made my mistake.
Moving my stop down to protect my
profits was the right thing to do.
The mistake I made was moving my stop too close for
the type of stock I was trading.
When I trade stocks, I normally trade
very high volume stocks.
Moving a stop fairly close is almost never a
problem when trading RIMM, EBAY, AMZN or AAPL.
But I was trading a lower volume stock – and I
forgot that important piece of volume and volatility
it cost me a bunch of money.
The stock had a “hiccup” –
within literally five seconds, it traded up to hit my
stop. Then kept going fast against me, giving me an extra
10 cents of slippage (slippage is the difference between
where you wanted your trade executed and where it actually
got executed) and knocking me out of my position with a
To add insult to injury, after this
little five-second “hiccup,” the stock was back down
and trading at its original “pre-hiccup” levels.
Had I put my stop in a more rational place given
the stock’s characteristics, I would have still been in
a very profitable trade.
As it stood, I made a few bucks, but gave away a
bunch because of a mental error.
now the real battle started.
I’m talking about the emotional battle that
takes place in a trader's or investor’s head when he or
she makes a mistake. I’ll
describe the battle that took place in my head and then
talk about how you can save yourself a bunch or money –
or make a bunch more – by following a few simple
– Good Company but Poor Guides
I had just given away a good chunk of
money. I was
using good trading tactics, but I failed to properly take
into account all of the conditions of my trade.
To be honest, I was mad.
I was mad at myself.
I was mad at this stupid stock (which, by the way,
had been a brilliant stock just moments ago!). I was mad
at the nameless, faceless traders that bought this stock
for a few moments when I wanted them to sell.
In my emotional state, I did
something I almost never do.
I jumped right back in and shorted the stock at its
“in the hole” as some of my fellow traders call it.)
Then a wonderful thing happened.
This second mistake of the morning
cleared my head. I
had made this mistake before.
Sirens were going off in my head.
I was seeing red flags.
My gut clenched up.
And I did the exact right thing – I immediately
got out of this ill-advised, emotionally driven trade.
No thought involved. No analysis to see if, in
fact, the stock could drop further.
Nothing but a click of the mouse and out for a
scratched trade (or a breakeven trade).
So the story does have a bit of a
happy ending. Within
minutes, the stock moved strongly the other way and I was
safely on the sidelines.
And with my emotions now in check, I could go back
and analyze this stock and the markets rationally.
My strategy was done for the day on this stock.
So there were no more signals to act on.
It was time to move on.
And so, my lessons of the past really saved my
bacon this time around.
Trade and Invest Based on Your
Strategy, Not Your Emotions
I know of no trader or investor who
makes better decisions when he or she is emotional.
Not one. So let’s look at three steps to take
that will ensure that you can make your trading and
investing decisions based on proven strategy, and not your
current emotional state.
To follow a strategy, you have to
have a strategy. Why
do you enter and exit your trades and investments?
If your answer is anything other than, “I base my
entries and exits on a written strategy,” then you have
left yourself wide open to make emotion-driven trades.
Every good trader and investor I know has a clearly
defined strategy that guides all of their decisions.
Strategies can include written trading systems,
computerized trading systems, following every pick from a
newsletter and many others.
But you must know and apply your strategy to get
If you know you are in an
emotional state, don’t take any action.
If you find yourself getting emotional, just walk
away and come back later.
This applies to traders who are in front of a
computer screen or investors looking at the stock tables
in the newspaper. When
you are emotional, your decisions are compromised.
This is true for any extreme emotional state.
Euphoria can cause bad decisions just like anger.
So if your stock has just made a huge move and you
are ecstatic, you may want to buy every other stock in the
sector. Take a
deep breath and a long break.
Then come back and go over your decision when
you’re in a less elated state.
And most of all -- make your decisions based on
Learn to change your emotional
I made my second mistake in this trade, I used a
psychological tool that I learned from Van to immediately
change my emotional state.
There are some good resources for learning these
valuable “state change” techniques, but Van’s home
study course is the best one I know.
For more on this great resource (and every serious
trader and investor should use it), click
Emotions are a wonderful part of the
human experience. But
rarely do they help us make right decisions for trading
and investing. Stick
with your proven strategy and leave your emotions for
other areas of enjoyment.
D.R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.
He is a regularly featured guest analyst on both Report on Business TV,
and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.
His articles have appeared on SmartMoney.com and Financial Advisor magazine.
You may contact D.R. at [email protected].
Melita's Inspirational Corner
Quick to Judge
by Melita Hunt
This morning as I walked to my car, I
had to pass by four guys unloading a truck and it was
interesting to watch my own reaction. The thought popped
into my head “Oh geez, these guys are going to check me
out, and they might even make a comment.”
But I was also quick enough to catch the thought
and let it go. So what if they did make a comment or even
whistle? I’m a pretty woman, dressed nicely, getting
into a lovely sports car. A nice compliment usually feels
I continued on my way, got in my car
and drove off. There were brief glances, but there was no
actual interaction at all. In my unconscious state, I
chose to be judgmental of people I didn’t even know and
just scurried off. I probably looked like a real snob.
That is a prime example of past experiences and beliefs
guiding behavior. I am not going to go into the ins and
outs of these particular beliefs, where they came from,
to say most of us have enough “men and women”
interaction stuff to last us a lifetime!
In hindsight, I could have actually
just said “Hi!” and given a friendly good morning wave
to four other human beings who probably would have smiled
and returned the greeting.
This in turn reminded me of an
incident two days ago when I was walking into a chemist,
and I saw a woman who was having trouble walking. It
looked like she was experiencing some type of back pain,
and she needed assistance. I remember thinking “I wonder
how sick she is? Is she as sick as me? Does she have a
terminal illness or is she just being a drama queen?”
Ouch. Where did that come from?
Once again, I managed to “catch”
the thought pretty quickly and let it go, replacing it
with something much more compassionate but I also took the
time to take note of it for future reference and analysis.
I like to look at where my thoughts and beliefs come from.
Thoughts are continually racing
through our brains a mile a minute, day in and day out.
How often do we really pay attention to the actual
thoughts that we are having? And how many of them are
Neither of the thoughts that I
“caught” in the above examples had anything to do with
the actual people that I experienced in those moments. It
was all “my stuff.” It was all based on beliefs, past
experiences, and my projections.
So see if you can “catch” some of
your own judgments and interpretations as they flash
through your mind every second, disguised as thoughts.
And if you don’t think that you are
quick to judge, then you are either living the life of a
saint, and/or you tend to lie to yourself a lot. I would
hazard to guess that we all have an arsenal of things that
we are judgmental about: politics,
religion, Hollywood anyone?
Did I hear a scoff?
Melita Hunt is
the CEO of the Van Tharp Institute. If you would like to
keep up with Melita’s progress regarding her recently
diagnosed lung cancer. Please feel free to read her blog
You can contact Melita at [email protected]