Saturday, 24 October 2015

Added a link to the compound cumulative return study

Thanks to JC from Passive Income Pursuit.  You gave me an idea.  I owe you a cyber beer.

When I initially ran the study, I arbitrarily chose a buy rule in order to conceptually see if buying weakness (i.e., buy more incremental units only when SPY closes lower than the previous month).on an equal weighted dollar cost averaging basis improved results over simply buying the same dollar amount of units every month.

This got me thinking.  The study potentially demonstrated a close to a 25 bps improvement by buying weakness.  But, this rule is terribly arbitrary.  I think the rule should actually be something along the lines of:

"Once cumulative compound return turns negative, relax the monthly lower closing price rule and double down on allocations", in a nutshell, double the amount of capital contributions and actually buy weakness.

The initial rule prevents too much capital allocation into a rising market, and the relaxation of this rule contingent on cumulative compound returns turning negative enables an investor to take advantage of buying cheap.

Here is a chart comparing the performance in simply buying monthly equal dollar weight units in SPY vs. buying double SPY once cumulative compound return turns negative:

The difference in cumulative compound returns is almost 100 bps by allocating more capital to the buy program once cumulative compound return goes negative.

I think I'm going to add a link to a similar study on the blog using SPY starting at the end of August 2015 using monthly closes.  I'm darn curious now to see how this works in real time.  I'll be using the actual results of the monthly closes and cumulative performance to allocate my own capital in real time.


  1. Ciao Daniel,

    Very interesting study, I have my PF of stocks and while it might be easy to buy a "dip" in price it gets bloody hard to buy when the numbers are growing. Maybe if this method "works" it could give me a new strategy to deploy in a "bull" market rather than having to sit on the money waiting for a change in momentum or even a market crash..

    Ciao ciao


  2. Ciao come stai? I can only imagine how difficult it is to consistently adhere to a dollar cost average strategy, especially as the numbers get large. I can't say whether this method will work, as it's entirely possible that in real time, we're on the cusp of another cycle peak. What I wanted to establish with this study was a reasonable expectation of return given a passive strategy. I don't think dollar cost averaging is all that different from DGI's averaging down on their favourite holdings, which seemed to have been a regular occurrence during the September correction. What any individual investor ends up doing though must be a function of their own personality. It's also psychologically difficult to observe a bull market from the sidelines while in cash. To this, my thoughts are, stop watching. Turn off the financial news, turn off CNBC, turn off yahoo finance. It's very liberating turning it all off. And instead, read books on value investing. Read Klarman's Margin of Safety. Read Greenwald's Value Investing. Read Security Analysis and The Intelligent Investor. Start building your own valuation models from scratch. Run your own #s through the models. Take the pressure of wanting to do anything. These are some of the steps I've been taking. One of the most intriguing concepts I've learned from reading about value investing is that you don't have to swing at every pitch. It's ok to sit in cash. This is unconventional wisdom, but I believe it has merit.

    1. Ciao Daniel,

      All is well on this side of the globe (more or less), how about you? I totally agree with your take on things, there is nothing shameful in having "cash at hand" for "worst periods", or market crashes and as a matter of fact that is what I am keeping now, the last chunk of my investment is there looking at me, waiting to be deployed. But it might take a while till that happens, most of the stocks in my PF are not "growth" stocks, but rather established players who most likely will see a modest growth during the years, meaning that there is a chance that during corrections they might go below my average price and therefore start entering "buy territory".
      Problem is: sometimes a certain stock might take ages before it goes below the price that you are holding, and keeping cash for too long means that you are loosing opportunities of getting those dividends in, so that's why I was interested in this study you are making because maybe it's a good compromise to deploy capital without hurting YoC too much...

      Anyhow as I said I do think that sitting on cash is not so much of a problem, when interest rates pick up pace there will be opportunities in the bond market to park excess cash for some return, then the situation will be a bit better in terms of returns optimisation of the portfolio... :P

  3. On this side of the globe sir, we're getting ready for much colder weather in Toronto. All is well otherwise! Have you ever thought of leaving good til cancelled orders in, just in case there's a spike down on your preferred stocks?

  4. Ciao Daniel,

    Yes I have some orders on stocks that I want to acquire (but at a much reasonable entry point), I have some sell orders on stocks that have gone well up, and where I do not want to loose the gains if there is a nasty downturn.

    But so far no orders for downturns... Maybe I should pick one or two superspecial stocks and place them, is not a bad idea, thanks! :)

    As to Toronto's winters... I was there in July this year (love Toronto btw), I have been told about the nasty winters :( Would be dreadful to me, but I guess you guys are used to the cold weather!

    ciao ciao


  5. I always have some silly good til cancelled orders in the market. They seem silly today, but they would not have been so silly on August 24th when there was no liquidity for a short time.