A.I.M. Users Bulletin Board

[SFSecurity]

Hi Tom, Yes, it is true that the T. Rowe price table over ten years is considerably better than Buy and Hope as it has more volatility than is typical these days. I'm not sure why that is true but it seems that way to me.

I do wish that, like you, I had found Lichello's book back then rather than in 2002, and actually followed it, but, alas, other things got in the way. As a side note I still have the original purchase slip as a place marker in the book.

Anyway, back to the T. Rowe Price New Horizons Fund (PRNHX). During the ten year period under test the range was from a low of $15.51 up to $49.45 on a monthly listing basis from Yahoo, 318% overall. The table in the book goes from a low of $4.49 up to $15.36, 342%, almost the same total range.

All of the following tests were done with a 0% buy safe and a 10% sell safe.

I did the back test for the last ten years, starting on May 1st, 2007 through May 1st 2017, including dividends and commissions based on the current TDAmeritrade cost of $6.95, and AIM comes up short on a 50% cash basis as used in the 4th edition table on page 88. Buy and Hope gets $21,360 including dividends, 7.885%/year while AIM comes up with $20,258, 7.315%/year. This is with a minimum trade size of 10% and $1000. Reducing the minimum dollar trade size did not change anything. Interestingly enough as one increases the minimum trade size the return gets better. The initial stock purchase is 140 shares. At 100% minimum trade size the return is $20,922 including dividends, 7.662%/year.

However, if one switches to 30% cash (lower runs out of cash) and 100% (196 shares initial purchase) minimum stock trade size, the results are significantly better, $25,312 and 9.732%/year return. However, if the minimum trade size is 10%, the return is only $24,795 or 9.505%/year. The difference seems to be that the lower minimum trade size causes sells that cause lower dividend income.

Anyway, it seems like Lichello's later versions work better overall but it seems like there is still room for improvement.

Using Orcroft's approach of sitting on your hands waiting to hit bottom and back up a bit is, overall, better. If one assumes that the Buy and Hope investor got in May 1st, 2007, their result is, including dividends the same as before, $$21,360 and 7.315%/year. If the AIM investor sits on their hands until April 1st, 2009 and starts out at 20% cash and a minimum trade size of 10% the return is $22,482, 10.542%/year but if the minimum trade size is 100% (417 shares) the return is $31,923, 15.442%/year! So sitting on your hands is worth a bit over ten grand! And there are no buys or sales in that period, so one could use the dividend income for other purposes, like when another position runs out of cash.

Who says sitting on your hands doesn't pay? In this case it pays over ten grand in the long run, much better than the banks or bonds do.

If you reduce the minimum trades size to 50%, (210 shares)you get one sale and a return of $26,782, 12.961%/year.

Finally, it seems that if one is near the end of a bull cycle is is best to sit on your hands a while, so the question is, are we nearing the end of a bull cycle? I'm guessing yes, but I've been known to be wrong more than once.

Best,

Allen