TradeStops subscriber Dr. Peter A. recently wrote in expressing skepticism regarding our claim that using the TradeStops Stock State Indicator (SSI) signals on the Dow Jones Industrial Average (DJIA) could beat a buy and hold strategy.
He asked some great questions that deserve a closer look.
Peter wrote in to question my recent editorial comparing SSI signals versus buy and hold on the DJIA over a long period of time.
The following chart succinctly summarizes the argument.
Going back over 80 years, using the TradeStops SSI system to enter and exit the DJIA has produced better gains and done so with much less risk and less stress.
For buy and hold investors of the DJIA, there have been multiple declines of more than 50% and even a decline of 90% during the Great Depression. The declines using the TradeStops SSI system have been much more manageable.
Peter’s first observation was:
While I appreciate how trailing stops can limit losses, the chart shows that people who held on during the last 35 years have accumulated nearly as much as those who stop out, then buy back. It appears that the active traders also miss the enormous increases that follow large drops, and only get back in when the gain is considered “safe”.
35 years ago would take us back to 1982. You can see Peter’s point on the chart above. The SSI system hasn’t outperformed buy and hold dramatically over the past 35 years. Wouldn’t it have just been easier to use buy and hold?
Well, the pivotal point in my mind is whether you would have preferred to sit out the 2007 – 2009 market crash with just an 8% drawdown or if you would have been okay with your portfolio declining by 50% or more.
I’d much rather have been sitting in cash while everyone else was losing their financial minds.
Peter’s next point is absolutely critical to understand.
An additional problem with the active average investor, like me, is that we are not very disciplined. We sometimes ignore the stop signal b/c of hope, ignorance, laziness, or unavailability (during my vacation in the Galapagos Islands, for example). When we miss the signal, we sell and/or buy back well after we should have.
If you’re going to follow any strategy other than buy and hold, you absolutely do need to have the conviction, the discipline, and the tools to be able to execute the strategy.
I think that it’s clear that TradeStops provides the tools. If you’re going to go on a long vacation and you can’t check your email regularly, you can even add another person to your email alerts to keep an eye on things while you’re away.
The deeper issue, however, is the issue of conviction. I believe that discipline follows from conviction. The bottom line is that you’ve got to believe in your system.
That’s why we work so hard to keep TradeStops as simple as possible AND to write all of these inspirational and research-driven editorials! The most advanced algorithms in the world aren’t going to do you any good if you can’t pull the trigger when the going gets tough.
On that note, let me remind us all of the beauty of thinking in terms of reward vs. risk.
The chart I showed above is inspiring to see that you would have been able to make a little more money using the SSI over buy and hold and you would have had much shallower declines.
This chart, however, is downright shocking. It shows that when you think in terms of how much reward you earned for each buck of risk you took, the SSI strategy doesn’t just slightly nose ahead of buy and hold. It absolutely crushes it.
That’s what happens when you make more AND risk less.
I hope that you find it as inspirational as I do … and that it makes it a little easier to pull the trigger the next time you need to do so,