Buy & Hold vs 15% Gains.

[Deaddog]

There is no doubt that Mr. Market is a great, no HUGE, stock picker.
I do however have some doubt about the way he manages a portfolio. It seems to me that selling your winners and holding your losers is not the best way to take money out of the market.

Given that there is a huge talent for picking winners, why not let the winners ride?

What happens if we have a buy and hold scenario? Having limited data readily available here is what I found.

Starting with the last cycle, 18th August 2009, I took the first 14 stocks that Mr Market picked and held them until yesterday (May 23 2011). They are in order they were purchased: SYNT, NVEC, GYMB, CAAS, BUCY, SCL, ISRG, BOFI, CSH, CTSH, DECK, AAPL, PCLN, LULU.

Had $10,000 been invested in each of the 14 stocks the portfolio would be worth $208,686 for a gain of $68,686.

Starting at the same date and investing $10,000 in each of the 40 stocks Mr Market has bought since then and selling the portfolio yesterday; the total profit would have been $42,068.
That’s 26K less; you could have made a whopping 63% more by doing nothing. If you throw in a simple sell when it crosses a Moving Average rule you can do even better.

I don’t have ready access to prior data, but it would be interesting to see if the same was true of previous cycles. Karel, Billyjoe, anyone that’s been here for a while??? Dust off those old records and prove me wrong.

[peanuts]

Did you take into consideration the aspect of compounding gains which MM's model permits?

MM's model only considers the 15% from where he buys as being an achievable gain. If the model is for a strategy of buy and hold, or higher returns, then I think the initial screening criteria would be much different.

If you are a buy and hold investor, then do what you need to do to find your stocks. But MM's stocks are for the 15% only, and trying to use these screen results for another model may have consequences of which MM's model is not affected. It's like taking the wheels off a car and trying to put them on a horse... They're both transportation, but use different parts

[mrmarket]

There is no doubt that Mr. Market is a great, no HUGE, stock picker.
I do however have some doubt about the way he manages a portfolio. It seems to me that selling your winners and holding your losers is not the best way to take money out of the market.

Given that there is a huge talent for picking winners, why not let the winners ride?

What happens if we have a buy and hold scenario? Having limited data readily available here is what I found.

Starting with the last cycle, 18th August 2009, I took the first 14 stocks that Mr Market picked and held them until yesterday (May 23 2011). They are in order they were purchased: SYNT, NVEC, GYMB, CAAS, BUCY, SCL, ISRG, BOFI, CSH, CTSH, DECK, AAPL, PCLN, LULU.

Had $10,000 been invested in each of the 14 stocks the portfolio would be worth $208,686 for a gain of $68,686.

Starting at the same date and investing $10,000 in each of the 40 stocks Mr Market has bought since then and selling the portfolio yesterday; the total profit would have been $42,068.
That’s 26K less; you could have made a whopping 63% more by doing nothing. If you throw in a simple sell when it crosses a Moving Average rule you can do even better.

I don’t have ready access to prior data, but it would be interesting to see if the same was true of previous cycles. Karel, Billyjoe, anyone that’s been here for a while??? Dust off those old records and prove me wrong.

Go back to the Motley Fool in the 1990's...you'll find the same questions asked by Karel (Qarel) himself. Look where Karel is now

[mrmarket]

Did you take into consideration the aspect of compounding gains which MM's model permits?

MM's model only considers the 15% from where he buys as being an achievable gain. If the model is for a strategy of buy and hold, or higher returns, then I think the initial screening criteria would be much different.

If you are a buy and hold investor, then do what you need to do to find your stocks. But MM's stocks are for the 15% only, and trying to use these screen results for another model may have consequences of which MM's model is not affected. It's like taking the wheels off a car and trying to put them on a horse... They're both transportation, but use different parts

Righteous dude...righteous.

[Deaddog]

Did you take into consideration the aspect of compounding gains which MM's model permits?

Compounding; That has been mentioned a few times. How about an example of how we might safely compound out gains.

When we sell a stock for a 15% gain do we buy the next pick with the full proceeds of the sale? Or do we add the profits to the cash reserve and divide by the number of open positions.

It again comes back to position size and MR Market doesn’t keep track of that.

I buy based on the amount I feel like buying the day I make the purchase. If I'm feeling confident, I buy more. If I am feeling timid, I buy less.

How do we know that gains are compounded?

[mrmarket]

Compounding; That has been mentioned a few times. How about an example of how we might safely compound out gains.

When we sell a stock for a 15% gain do we buy the next pick with the full proceeds of the sale? Or do we add the profits to the cash reserve and divide by the number of open positions.

It again comes back to position size and MR Market doesn’t keep track of that. How do we know that gains are compounded?

Often times, I reinvest the proceeds of a sale into a new pick. In those instances, the gains are compounded...do this 5 times in a row and you have a 100% gain...woo hoo!

[smaskell]

Often times, I reinvest the proceeds of a sale into a new pick. In those instances, the gains are compounded...do this 5 times in a row and you have a 100% gain...woo hoo!

Careful, you're moving toward advisory service type claims that will get you banned by Karel!!

You could do that but doing so would cause you to be portfolio imbalanced, a double edged sword. If you do that and happen to roll extra money into VIT or NTES type picks that draw way down and remain there you will end up hurting your total return rather than helping it.

[mrmarket]

Careful, you're moving toward advisory service type claims that will get you banned by Karel!!

You could do that but doing so would cause you to be portfolio imbalanced, a double edged sword. If you do that and happen to roll extra money into VIT or NTES type picks that draw way down and remain there you will end up hurting your total return rather than helping it.

You got that right...

[Deaddog]

Often times, I reinvest the proceeds of a sale into a new pick. In those instances, the gains are compounded...do this 5 times in a row and you have a 100% gain...woo hoo!

OK I ran the numbers using the following assumptions:
Initial purchase amount would be $10,000 per stock.
When a stock was sold the proceeds of that transaction would be used to buy the next pick.

On May 23rd The MR Market portfolio would have invested 90K and have a value of 142.5K, a gain of 52.5K, for a total return of 58%

I screwed up on my initial calculation of the buy and hold results. (It happens when you cut and paste in an excel spreadsheet) I showed a gain of 68.7K, which in reality should have been 56.8K. While this result is slightly better than the 52.5K achieved by compounding, the initial investment requires was 140K ($10K per position), which gives a total return of 37%.

There is much to be said about the value of compounding.
As His HUGEness so eloquently articulates WOO HOO!!!!

[mrmarket]

OK I ran the numbers using the following assumptions:
Initial purchase amount would be $10,000 per stock.
When a stock was sold the proceeds of that transaction would be used to buy the next pick.

On May 23rd The MR Market portfolio would have invested 90K and have a value of 142.5K, a gain of 52.5K, for a total return of 58%

I screwed up on my initial calculation of the buy and hold results. (It happens when you cut and paste in an excel spreadsheet) I showed a gain of 68.7K, which in reality should have been 56.8K. While this result is slightly better than the 52.5K achieved by compounding, the initial investment requires was 140K ($10K per position), which gives a total return of 37%.

There is much to be said about the value of compounding.
As His HUGEness so eloquently articulates WOO HOO!!!!

Excellent...