50% a Year???

David Forrest ([email protected])

Alexandria, VA (November 6, 1998) -- What's a reasonable rate of return to expect when investing in the stock market? Historically, the large indices like the Standard & Poor's 500 Index and the Dow Jones Industrial Average have returned 10-12% per year. Some of the smaller capitalized stocks as represented by the Russell 2000 Index have returned around 12.5-15% annually over the last century. These are the approximate benchmarks that people use when evaluating their returns. The entire Dow Dividend Approach was built with an eye towards beating the Dow. Historical returns for the Dow Approaches range from 16-22%, depending on time frame and who you talk to about it.

As many of you know, the spirit of the Foolish Workshop is to develop, in Mad Scientist Laboratory fashion, better solutions. We pursue greater returns through the use of backtesting and logical analysis. Robert Sheard spearheaded this early on for the Motley Fool by developing such screens as the Keystone Approach, Formula 90, and others. Robert was looking to beat the returns from the Dow Dividend Approaches. Keystone, for example, has annualized 28% over the last 12 years.

In keeping with this spirit, the members of the Fool Workshop (everyone who shares information and posts on our message board) have been backtesting strategies of their own and posting the results. In recent memory, much interest has been swirling around Sparfarkle's Spark 5 approach, which, according to Sparfarkle, has annualized 42% since 1986. No official Foolish backtesting has been done on the Spark 5 yet, but we hope to do some soon. In fact, we started to add the Spark 5 to our weekly list of rankings.

On the heels of Sparfarkle, a Fool named MChernick claims to have a method of crushing even the mighty Spark 5. MChernick says that his screen, named the EG 5 (EG=Estimated Growth), has returned 52% annualized since January of 1986. We have NOT backtested this. We're not claiming it to be true. Still, if the numbers bear out, and look good when backtested even further, this is compelling stuff. Is 52% a year too much to ask? Who knows.

I encourage everyone to get out to our web Workshop message board and read up and ask questions about the Spark 5 and the EG 5. These are exciting new contributions from our community and deserve your attention. Hopefully, in the near future, we'll be able to backtest these models and offer the audited results.

Have a great weekend!

Bogey

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