Last week, I questioned whether the Keystone 100 growth strategy can perform well in all types of markets. As it turns out, my doubts may have been unfounded. Workshop writer Moe Chernick took a look at the strategy from a different perspective, and now it looks better to me, too.
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By that definition I was absolutely brilliant last week when I wrote Confusing Genius With a Bull Market. Luckily our readers are pretty bright, too. Craig McCarter of Manassas, Virginia, wrote in the next day pointing out that the numbers I quoted in the article didn't match those in the discussion board post that I supposedly got them from. Ooops.
They weren't just off by a digit or two. About half of them were completely different numbers. Big ooops. I have no idea how I managed to mess them up that badly. I was never very good at cutting and pasting in second grade, and, apparently, I haven't improved since. But the correct numbers didn't really change my general conclusion, so I corrected them on Monday and that would have been the end of it. Except now I think I was wrong about my conclusions as well.
Last week's article dealt with a large-cap growth strategy developed in the Workshop called the Keystone 100. Back in February,I suggested that the Key100 might be a good companion strategy for the Foolish Four. It also invests only in large-cap stocks, but Keystone selects for high growth rather than value. In theory, anyway, it should do well when the Foolish Four does badly and vice versa.
I really hated to back away from that because the Keystone 100 is up 50% so far this year. But I had based my original conclusion on the first back test performed on the strategy, which only went back to 1986. The new back test (performed entirely by the Mechanical Investing discussion board community) went all the way back to 1969, and it showed a very different picture. Here is the corrected table of those results.
Strategy GSD* 1969-85 GSD* 1986-98
Keystone 100 42.52% 34.33%
S&P 500 18.91% 12.13%
The GSD number is a measure of volatility. As you can see, in the first back test, 1986-98, the GSD is roughly the same as the CAGR. But compare the volatility with the returns for the earlier period. It's almost four times as high! That's stomach-churning. I wasn't interested in a strategy that was going to be that volatile during mixed and bear markets, especially when the returns were not that much higher than the market.
Or that's what I thought last week -- until Moe Chernick, one of our Workshop writers, decided I was full of it. "Why are we breaking these periods up based on the completely arbitrary date that corresponds to our back test?" he asked. He took the data apart and looked at it another way. Moe wasn't looking for proof the strategy worked this time. Instead he was looking for clues about how it performed during different market conditions. In Tuesday's Workshop column he broke the data up into the following three periods:
GSD Bear Bull Roaring Bull
Strategy 1969-74 1975-94 1995-99
Keystone 100 21% 25% 32%
S&P 500 17% 13% 6%
Well, this puts things in a different light. The volatility during the bear market was still stomach-churning, but not a whole lot more so that the volatility of the S&P 500. (That was a nasty period for investors.) The volatility goes up during the bull markets, but then so do returns. This is easier to live with.
I'm still not crazy about the bear market performance, but those were miserable times for investors. A measly one-percentage-point return better than the S&P is probably not statistically significant. But looking at it this way diminishes my concerns about the volatility.
Next Thursday, I will take a look at how the Foolish Four did during these same time periods, and we will see if my original contention -- that the two strategies might complement each other -- holds up.
Fool on and prosper!
-- Source Unknown
Strategy CAGR 1969-85 CAGR 1986-98
Keystone 100 11.15% 31.02%
S&P 500 8.88% 17.75%
*GSD: Geometric standard deviation, the appropriate standard deviation for compound annual growth rates (CAGR) as quoted above. Lower GSD means less volatility.
CAGR Bear Bull Roaring Bull
Strategy 1969-74 1975-94 1995-99
Keystone 100 -5% 28% 61%
S&P 500 -6% 15% 29%