<FOOLISH WORKSHOP>
Back to the Books
by Ethan Haskel ([email protected])
Baltimore, MD (December 2, 1998) -- There are probably more than a few of you out there who are about to partake in an annual December ritual. No, I don't mean wading knee-deep among holiday shoppers in the quest for a Furby doll or that special something for your Aunt Sadie. What I'm referring to is studying for final exams and writing term papers.
Although it's been way too long since my last undergraduate course, I still recall the tedious nights spent in the library. Hours upon hours reviewing mind-numbing facts and statistics. Scrolling endlessly through the mysteries of that strangest of media, microfilm, to find the perfect article that would supply the perfect quote to support the perfect thesis for the perfect final paper.
No, it wasn't fun, but it sure had a purpose. This academic drudgery was a necessary means to an important end. The "end" was the attainment of knowledge or, in extraordinary circumstances, wisdom. Without the grunt work, this ultimate prize would be unattainable.
I view backtesting of stock screens in the same light. No one wants to do it. It's boring. It's time consuming. It's not sexy.
But it's essential.
A stock screening strategy that hasn't been backtested is useless to me. Such strategies may be interesting, sure. They may make perfect sense, based on modern investment theory. They may make great fodder for the Foolish message boards. But would I plunk down my hard-earned moolah to invest in stocks screened on the basis of great theory? No way!
Supreme Court justice Oliver Wendell Holmes, known as "The Great Dissenter," said it best: "A page of history is worth a pound of logic."
In a sense, then, backtesters are historians delving into the past in order to shed light on the future. Most of us who've spent cold December evenings sequestered in libraries writing those history papers recognize that digging through dusty old tomes is the first step towards enlightenment.
My backtest of the Beating the S&P (BSP) strategy required many nights of becoming reacquainted with the local college library. To find the annual BSP 30 stocks, I scrutinized microfilm of back issues of Business Week. These stocks then needed to be cross-checked with the then current Dow stocks to prevent overlap. Then it was on to The Wall Street Journal (more microfilm) to find the stock price and dividend yield for each of the 30 stocks as of January 2nd of the year.
Armed with this data, the top 10 high yielding BSP stocks for the year were chosen and sorted according to price. Finally, I had to calculate the total returns for each of the top BSP stocks, courtesy of the Daily Stock Price Record. Mergers, spin-offs, dividends, and splits all had to be accounted for. Then it was on to the calculations, all the time double-checking the numbers for accuracy. The process was repeated for each year.
It's a lot of work, but it's worth it. And the results? Listed below are annual returns for the Beating the S&P Portfolio stocks from 1987, which is when the database became available.
Year Beating the S&P S&P 500 Index
1987 +13.1% +5.2%
1988 +32.1% +16.8%
1989 +25.8% +31.5%
1990 -4.3% -3.2%
1991 +25.5% +30.6%
1992 +3.9% +7.7%
1993 +20.2% +10.0%
1994 +5.6% +1.3%
1995 +40.0% +37.4%
1996 +33.5% +23.1%
1997 +33.0% +33.2%
1998(YTD) +28.6% +21.0%
Compound Annual Growth Rate since 1-2-87
+20.8% +17.3%
Compound Annual Growth Rate since 1-2-94
+28.0% +22.9%
Anheuser Busch +43.2% Emerson Electric +17.5% Ford +65.3% Kimberly-Clark +9.0% Texaco +7.8% Beating the S&P +28.6% S&P 500 +21.0%
Compound Annual Growth Rate from 1-2-87
Beating the S&P +20.8% S&P 500 +17.3%
Check out the latest file updates for the Workshop:
New Rankings
| 1998 Returns
| New Database