<FOOLISH WORKSHOP>

Comparing the Returns

by Ethan Haskel ([email protected])

Baltimore, MD (Dec. 16, 1998) -- Two weeks ago we examined the not-so-simple process of backtesting the Beating the S&P (BSP) strategy and showed its year by year returns since 1987. Today I'd like to look at these returns and compare them to some other popular strategies.

The following data is courtesy of Ben Goldman, who has been tabulating the returns of many of our most popular strategies. Thanks also to many of the Fools who have collected the data that Ben compiles.

I've chosen to compare BSP to the most popular Dow Investing value strategies. I threw in the Keystone 5 strategy, a large stock growth screen, for interest's sake. The data is complete up to 11/27/98 except for the RP4, Foolish 4, and Beating the Dow (BTD5) strategies, which for technical reasons, were updated as of 11/13/98. I don't think the small time frame difference will have much effect on the conclusions.

I've also included the Sharpe ratios for each strategy. The Sharpe ratio gives a reward-to-risk rating on a strategy by taking into account the volatility of the returns. Thus, the higher the Sharpe ratio, the better the risk-adjusted returns. Check out TMF Sandy's excellent column for all the scoop on this ratio.

Compound Annual Growth Rates
1987 to Present

Keystone 5    29.6%
RP4           22.4%
BSP           20.6%
Foolish 4     20.5%
BTD5          17.5%
Dow 30        17.4%
S&P 500       17.3%

Compound Annual Growth Rates
Past 5 Years

Keystone 5    35.5%
BSP           27.4%
RP4           23.3%
S&P 500       22.9%
Dow 30        20.5%
Foolish 4     19.7%
BTD5          19.5%

Sharpe Ratios
1987 to Present

BSP            1.139
Keystone 5     1.106
RP4            1.021
S&P 500        0.934
Dow 30         0.895
Foolish 4      0.726
BTD5           0.717

Sharpe Ratios
Past 5 Years

Keystone 5     1.906
BSP            1.889
BTD5           1.749
Foolish 4      1.706
S&P 500        1.441
RP4            1.382
Dow 30         1.366

Some general observations:

-- Since 1987, the value strategies BSP, RP4, and Foolish 4 have provided fairly comparable returns, with RP4 perhaps having a slight edge. All these strategies have outpaced the benchmark Dow Jones Industrial Average and the Standard & Poor's 500 Index. The plain old vanilla Beating the Dow (BTD5), the strategy that initially inspired us all, has only matched the indices since 1987.

-- Since 1987, the Sharpe ratio for BSP has been the highest of all the strategies -- even higher than the Keystone 5, which has a significantly higher overall return. Thus BSP has been significantly less volatile, compared to the other value strategies, while achieving comparable returns.

-- Over the past 5 years, BSP appears to have a higher return than all the value strategies. In fact, the Dow dividend strategies (RP4, Foolish 4, and BTD 5) have pretty much equaled or underperformed the S&P 500 in this time frame. I'll leave it up to you, dear readers, to debate whether this is a statistical anomaly or a hint that these strategies might be struggling under the weight of their popularity.

-- All the Dow dividend strategies were boosted dramatically in 1991, when one of the components, Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>, gained 182%. Given the relatively short time frame, even one stock's performance can have a large effect on overall returns. In a future column, we'll analyze some of this data from a statistical standpoint.

In last week's column, we discussed the myopic approach many non-Fools take to analyzing their investments and the importance of living in what we've called the long now. Many readers wrote to inform me that, contrary to what I had written, the quote system of Yahoo! often displays charts going back to 1977 and occasionally longer. That's certainly an improvement, although we'd like to see even longer data sets for companies whose life can span almost a century. For example, one's outlook on a BSP stock like Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> certainly can change depending on whether one takes a short-term perspective or a longer one. See how the signal to noise ratio in Gillette's one year price chart confounds the truly astounding long term returns that await patient investors. The chart of Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> again demonstrates the value of maintaining a long now perspective.

******

Beating the S&P year to date returns (as of 12-15-98):

Anheuser Busch    +49.1%
Emerson Electric   +9.8%
Ford              +56.6%
Kimberly-Clark     +7.2%
Texaco             +4.2%
Beating the S&P   +25.4%
S&P 500           +19.8%

Compound Annual Growth Rate from 1-2-87:

Beating the S&P   +20.5%
S&P 500           +17.2%

$10,000 invested on 1-2-87 now equals:

Beating the S&P  $92,800   
S&P 500          $56,200

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database