Buy and Hold in the Real World:

More on why buy & hold depends on what you buy and hold.

On a previous post I reviewed the April 2012 the Getting Technical market letter Canadian Multi-Nationals Buy & Hold portfolio which over the long term was to outperform the broader stock indices. At the close November 8, 2013 the selections returned 62% outpacing the TSX Composite and the S&P500 by a wide margin.

The Canadian Multi-Nationals Buy & Hold portfolio was selected using only technical analysis as a tool for portfolio construction and maintenance. This is the flip side of technical analysis being associated with speculative market timing and day-trading.

Strategic Planner, Jack Di Nardo of Wealthworks Financial sent me his latest Client Bulletin - November 2013 (Investing vs. Trading) and I quote a portion:

“Trading, which most people confuse with investing, includes any methodology that takes its cues from the price action of various markets, such as, technical trading, day-trading, and momentum (earnings, price or volatility amongst others) trading or buying on rumours because your friends insist the price of the stock is going to go up!

There are basically only three broad methodologies used for selecting individual companies with everything else being a variation upon these. They are value-based, growth-based or growth at a reasonable price (GARP) based security selection. But at the end of the day they are all dependent upon expected profit (and economic) growth over time.”

It appears Jack is claiming technical analysis is for speculative trading and not for use in portfolio construction and maintenance.

I am sure many technical analysts would not agree with Jack’s opinion because many of us have and currently use technical analysis for portfolio construction and maintenance.

A good “real money” example was the Union Securities Hybrid Investment Program, managed in a discretionary manner by a registered portfolio manager (PM) using both "fundamental" and "technical" analytical tools to select securities. The PM and Getting Technical Info Services (GT) would split the Hybrid Portfolio with about one half of the portfolio being fundamental (PM) selections and the other half being technical (GT) selections.

The Union Securities Hybrid Investment Program was closed in mid 2012 when in October 2012; all of Union’s client accounts and assets were transferred to another IIROC Dealer Member.

I did however track an original “Mandate #4” Hybrid portfolio beginning with all the equity components at November 9, 2011 and hypothetically held through to November 12, 2013. The Union Hybrid Mandate #4 program was in the aggressive growth category that allowed up to an 80% exposure to equities and 20% to fixed income.

Summary of Returns; November 9, 2011 through to November 12, 2013.

Our benchmark The TSX Composite had a 2 Year capital return of +9% over the study period.

 

There were 12 fundamental selections with a 2 Year capital return of -8 %, see table #1

Table #1

 

Observations:

The fundamental (PM) would have done OK except for two problems that seem to be common in many fundamental methodologies. Our PM was drawn into a value trap (RIM or BlackBerry) and our PM was caught in the need-to-own-gold as a hedge trap.

I can tell you that in the world of money management, when new investors entered into the Hybrid program they were placed into the same fundamental selections as the earlier investors. So late comers paid more for units of the stronger positions and they paid less for units of the weaker positions.

We know through the study period about one third of the selections were declining and so in this situation the newer investors did better (or lost less) than the older investors.

There were 15 technical selections with a 2 Year capital return of + 32% see table #2

Table #2

Observations:

The technical (GT) selections did well by avoiding the compelling stories that can put a positive fundamental spin on the wrong stock at the wrong time.

All of the GT selections were based on technical conditions such as long bases, improving relative performance and rising long term moving averages.

Once again new investors to the Hybrid program were placed into the same technical selections as the earlier investors. So as late comers they paid more for units of the stronger positions and they paid less for units of the weaker positions.

We know through the study period most of the selections were advancing and so in this situation the older investors did better (or lost less) than the newer investors.