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Now I want to emphasise that this is a hypothetical. I am using historical prices, in hindsight. It is really only to demonstrate the hypothetical difference between buy & hold as advocated by ‘whomever’ and my methodology. I will evidence my ‘hypothetical’ with some real evidence however.

Here is my marketocracy portfolio. You can see that I opened the trade on December 21 2011 and have had a holding period of 568 days currently. You can also see that I had one sale of stock on February 12 2013. The portfolio started with a 50% allocation to stocks via SPY and 50% to cash. In hindsight that 50% was probably too conservative, however, that is the figure I will work with.

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Now for the hypothetical. Let’s imagine first that I bought the SPY at the peak of 2000, and contrast that with a buy & hold investor.

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I will call the peak in 2000 as $150.oo. Therefore, using the same allocation, viz, 50%, I would have purchased 3333 shares [$500K] of SPY. Our buy & hold investor would have purchased 6666 shares [$1M]

At the bottom in 2003 the buy & hold chappie would have a value of $533,280 an almost 50% loss. I on the other hand would have a value of $266,640 in stock and $500,000 in cash, at which point, I purchase 2583 shares at a cost of $206,640.

Fast forward in time and: 2007, the value of SPY is again $150. Our buy & hold chappie is back to $1M after 4 years of stress. I on the other hand am worth $887,400 in stock and $293,360 in cash [earning money market rates] which is a 4.2% compounded return on total capital. On invested capital it is a 15.42% compounded return.

At this point I sell [perfect hindsight] 1991 shares at $150 for $298,650 in cash added to my existing cash of $293,360 = $592,010

Fast forward to 2009 and $70. Our $1M buy & hold is again worth $466,620. My portfolio is worth $274,750 with $592,010 in cash for a total of $866,760 an approximate 15% drawdown as opposed to a 55% drawdown.

I buy 2825 shares at $70 for $197,750, reducing my cash to $394,260 and fast forward to today at $160. Our buy & hold chappie has $1,066,560, he is showing a profit.

I am showing $1,080,000 + $394,260 = $1,474,260 a profit of 3.03% compounded on total capital, or, 6.10% compounded on originally invested capital.

Now although I have used just the major turning points in the chart, trading once every 4yrs or so, you can actually trade a little more often if you wish…and of course you will have to, not having the benefit of perfect hindsight.

The purpse of this hypothetical is to demonstrate that a rational ‘timing’ the market strategy will significantly outperform a buy & hold strategy.

To profit in the market, at some point you have to buy and at some point you have to sell. Now my current portfolio is only 2yrs into the process, unlike the hypothetical which ran for 13yrs. Check back in 11yrs time.

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