Is trend your friend?

[aca_trader]

By comparing Buy & Hold with Trend Following, we are comparing two aspects of the same thing. However, comparison with the help of a daily chart is not the correct way of doing so.

Buy & Hold is essentially a trend following concept as markets keep on rising in a secular way. On a longer-term chart like yearly, trend will always be up from 1970 as only higher pivots are made. If we assume that a Buy & Hold decision is for an average period of 30 years, for a meaningful comparison we need a trend-following system which will require a decision making for 30 years when the trade is initiated.

Now, for taking a trade/investment decision with a 30 year horizon, certainly not a single chartist will use a Daily Chart. What about comparison of Buy & Hold with Quarterly/Yearly periodicity based Trend Following system?

Best Regards,
--Ashish

 

[aca_trader]

Further, if the investor is intelligent enough to alocate his portfolio between Buy & Hold Equity and Debt-Paper, he would be smart enough to do the same even with Trend-Following Equity Investment and Debt-Paper Investment. Hence, for a meaningful comparison, let's compare the equity returns only.

Best Regards,
--Ashish

 

[oxusmorouz]

Now, for taking a trade/investment decision with a 30 year horizon, certainly not a single chartist will use a Daily Chart. What about comparison of Buy & Hold with Quarterly/Yearly periodicity based Trend Following system?

Enclosing the results for weekly and month charts.

Note that investments are not made with a purview of 30years but to earn abnormal profits trading short durations, hence the question of yearly, monthly etc are ruled out. Besides, when trading monthly's from 1970, we are restricted to using only 12*35 = 700 bars for testing, compared with the 8,000 odd bars using dailies. This again brings us back to deduction 1 which states "Trend following works in the short run", since the system is "beyond" the limitations of time and takes into consideration only no of data (bars). I have taken particular caution in this step.

Further, if the investor is intelligent enough to alocate his portfolio between Buy & Hold Equity and Debt-Paper, he would be smart enough to do the same even with Trend-Following Equity Investment and Debt-Paper Investment. Hence, for a meaningful comparison, let's compare the equity returns only.

Good point. Accepted
However, we are again ignoring the costs of active trading, incorporating which would affect the end results in a much more significant manner.

 

[Laksh]

In the 8th Edition of the book Technical Analysis of Stock Trends by Edwards & Magee there is a detailed analysis and comparision of returns Dow Jones Industrial Average on the basis of buy and hold and trading / investing on the basis of Dow theory. The analysis is long and detailed; but the conclusion is :
If one invested $100/ at the lowest point of 29.64 on August 10, 1896 and sold at the all time high of 11762.71 in January 2000 the investment would have grown to $39685.03; whereas entering and exiting on the basis of Dow theory for the same period the invesment would have grown to $362,212.97. What would you like to say about this?

 

[Laksh]

In the ultimate analysis buy and hold is also a trend following investment method. In this case the trend is the long term positive growth of economies, as has earlier been pointed out by Ashish.

 

[beginner_av]

By comparing Buy & Hold with Trend Following, we are comparing two aspects of the same thing. However, comparison with the help of a daily chart is not the correct way of doing so.

Buy & Hold is essentially a trend following concept as markets keep on rising in a secular way. On a longer-term chart like yearly, trend will always be up from 1970 as only higher pivots are made. If we assume that a Buy & Hold decision is for an average period of 30 years, for a meaningful comparison we need a trend-following system which will require a decision making for 30 years when the trade is initiated.

Now, for taking a trade/investment decision with a 30 year horizon, certainly not a single chartist will use a Daily Chart. What about comparison of Buy & Hold with Quarterly/Yearly periodicity based Trend Following system?

Best Regards,
--Ashish

This started out as an experiment. The assumptions were not stated very clearly. That would have laid to rest all doubts that we (including me) have raised.
I would like to point out 2 things.
1. B&H and TF are not the same thing if you are trading long and short sides.
2. Its not that someone invested with a 30 year horizon. Then he wouldn't look at charts at all. As far as I understand, the comparison is with a trader who trades everyday over a 30 year horizon.

If we bring asset allocation here, the ball game will be completely different. the oil shock of the 70s, gold prices etc will led to asset realignment and change overall performance. And this would lead to infinite possibilities. Here the comparison is between B&H and TF of Dow.

 

[oxusmorouz]

This started out as an experiment. The assumptions were not stated very clearly. That would have laid to rest all doubts that we (including me) have raised.
I would like to point out 2 things.
1. B&H and TF are not the same thing if you are trading long and short sides.
2. Its not that someone invested with a 30 year horizon. Then he wouldn't look at charts at all. As far as I understand, the comparison is with a trader who trades everyday over a 30 year horizon.

Hello BAV,
Total returns over the period of 36years can be split into summation of individual returns for each year, for a period of 30years, better expressed as:
Sigma [(P1 - P0) + (P2 - P1) + (P3-P2) ....(Pn - P (n-1))]
Where P0 is the price at the beginning. P1 is the price at the end of the 1st year and Pn being the price at the end of the nth year.
So, instead of stating that "a person has a 30 year horizon", a better statement would be that a person has "30 * 1 year horizon" where each year returns play a role, and the case at the end of the 30years is pretty immaterial.

BAV, I am posting the wikipedia definition for trend following:
"In finance, trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The system aims to work on the market trend mechanism and take benefit from both sides of the market enjoying the profits from the ups and downs of the stock market."
From my understanding I can say that any system which has used short selling has ended up in negetive value addition, and any system which does not use short selling cannot be termed as "trend following" in nature.

 

[oxusmorouz]

In the 8th Edition of the book Technical Analysis of Stock Trends by Edwards & Magee there is a detailed analysis and comparision of returns Dow Jones Industrial Average on the basis of buy and hold and trading / investing on the basis of Dow theory. The analysis is long and detailed; but the conclusion is :
If one invested $100/ at the lowest point of 29.64 on August 10, 1896 and sold at the all time high of 11762.71 in January 2000 the investment would have grown to $39685.03; whereas entering and exiting on the basis of Dow theory for the same period the invesment would have grown to $362,212.97. What would you like to say about this?

Again, my reply to this would be same as above. Going by the definition of trend following, The Dow theory cannot be called trend following in nature because it doesn't take into account short selling.
Robert Colby, in his book "Encyclopedia of Technical Market Indicators", has conducted a similar experiment from 1900 to 2000, where a 100$ account turned into 864,000$, a return of 9.5% odd. However, taking into consideration short selling from 1900 to 2000, the result dwindles to 5.2%. Posting the results for the same. To be fair, this seems to be one of the better performing..eh, trend following systems.

 

[oxusmorouz]

Hello

In short term trading we need to consider the role of using leverage. Without leverage how can one do better than B&H?.

The advantage with B&H would be that it has more "Time in the market", where as while trading the swings (lets assume) even with 60% or so effectiveness what about the time lost, trying to "Time the Market"?

Best Wishes
Rakesh

Hello Rakesh,
If leveraging in a trend following system earns abnormal profits, then leveraging in buy-hold should produce no worse a result. Excessive leveraging in buy-hold would have made the account go bust in 1931...and the trend following system sooner or later. (Source: Practical Speculation)

 

[kkseal]

...Total returns over the period of 36years can be split into summation of individual returns for each year, for a period of 30years, better expressed as:
Sigma [(P1 - P0) + (P2 - P1) + (P3-P2) ....(Pn - P (n-1))]
Where P0 is the price at the beginning. P1 is the price at the end of the 1st year and Pn being the price at the end of the nth year.
So, instead of stating that "a person has a 30 year horizon", a better statement would be that a person has "30 * 1 year horizon" where each year returns play a role ...

This would produce the best returns imo.

Returns can be enhanced further
i) by booking profits twice or thrice each year during the relatively deeper corrective phases of the mkt & reentering at lower levels
ii) short selling during the same (provided there's scope beyond intraday, else the Index can be used as a proxy)
iii) leveraging (if there's scope for longer term leveraging in the stock/s)

The definition however remains irrelevant to me - whether you call it B&H or TF.

Regards,
Kalyan.