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MARK VAKKUR S CONTRIBUTION TO SEASONAL INVESTING
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Mark Vakkur, MD, mentioned in the beginning of this chapter, expanded upon Hirsch s BSM strategy Vakkur compared six strategies to buy-and-hold and cash for the 1950 1995 period published in the June 1996 issue of the Technical Analysis of Stocks & Commodities magazine8 Vakkur did not include reinvested divi-
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dends, which would bolster the buy-and-hold results The strategies tested by Vakkur included the following: 1 Avoid September entirely: Liquidate investments on the last trading day of August, and buy back on the first trading day in October Then, don t sell again until the last trading day of August of the next year Do the same for all subsequent years 2 Invest using Hirsch s BSM strategy using November entry and April exit dates 3 Invest during Hirsch s worst months using a May entry and an October exit date 4 Adopt a switching strategy: Be 100 percent invested in the best six months of November, December, January, March, April, and July Be 50 percent invested and have 50 percent in cash (T-bills) in the next best three months of February, August, and October And be 100 percent in cash for the worst three months of May, June, and September 5 Have a 2:1 leverage, where 50 percent is invested with margin (2:1 leverage) for the best six months As defined in strategy number 4, 100 percent is invested in the next best three months, and 100 percent is in cash for the worst three months 6 Invest in all months of the year with 2:1 leverage
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Results of Vakkur s Analysis Table 7-4 contains the performance results of Vakkur s strategies During this 45-year period simply buying and holding the S&P 500 Index with a $10,000 stake in 1950 resulted in a total ending principal in 1995 of $372,388, which is equivalent to an average annual return of 84 percent Investing solely in cash (T-bills) for the entire 45 years, rather than in the S&P 500 Index, resulted in a total ending principal of $110,905 This provided a 55 percent annual return with $261,483, less than buy-and-hold Cash is not a viable investment, especially when adjusted for inflation Now, let s review the results of not investing during September By eliminating this one month each year, the total
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Vakkur s Seasonal Strategies Using the S&P 500 Index January 1950 December 1995
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Strategy Used $372,388 840% 1440% 1390% 960% 860% 280% 360% 550% 1020% 1000% 020% 1040% 2150% 2850% 730% 870% 950%
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Value of $10,000 Average Annual Return Standard Deviation Risk-Adjusted Ann Return 5700% 5680% 3440% 3290% 1440% 4020% 7910% 11940%
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Maximum Annual Gain
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Maximum Annual Loss 4130% 3350% 1660% 2690% NA 2470% 4960% 7060%
Buy-and-Hold 960% 990% 400% 550% 1080% 1230% 390%
Ignore September Nov April/T-Bills* May Oct 100% Cash Switching 2:1 Leverage Jan Dec 2:1 Lev
$624,135 $703,935 $58,670 $110,905 $997,620 $1,839,958 $54,903
Dividends were not included in this analysis
*Invested in T-bills for the remaining months Fully invested during best 6 months, 50% invested and 50% in T-bills for next best 3 months, and 100% in T-bills for worst 3 months which are May, June, and September 50% margin for best 6 months,100% invested (no margin) for next best 3 months, and 100% T-bills for worst 3 months
Always using 50% margin in all months This equivalent to 2:1 leverage
NA - Not applicable
Source: Seasonality and the S&P 500, Mark Vakkur, MD, Technical Analysis of Stocks & Commodities, vol14, no 6, June 1996, pp 38 47 Technical Analysis, Inc Used with permission
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proceeds were $624,135, or an annual average return of 96 percent which is $251,747 better than buy-and-hold Moreover, the standard deviation (measure of volatility) and maximum 12month loss encountered was lower than buy-and-hold That means an investor was getting a higher return with less risk That is the smart way to invest According to the Formula Research newsletter (August 21, 2001), September has been the worst month over the past 25, 50, and 100 years: In a study of 20 global markets from 1970 to 1992, September was the only month with negative returns in all 20 cases The Hirsch BSM Strategy of being invested from November to April did even better, totaling $703,935, or a 99 percent average annual return That performance was $331,546 better than buyand-hold This strategy also had a much lower standard deviation and lower maximum 12-month loss than buy-and-hold The opposite strategy of buying and remaining invested during the six unfavorable months of May through October resulted in only $58,670, or 4 percent annualized with a lower standard deviation and lower maximum 12-month loss than buy-and-hold Clearly, the worst six months is consistently poor in all respects A switching strategy was also tested, where a 100 percent invested position was taken during the best six months, as determined in strategy number 4, mentioned previously (Note that this is a variation of Hirsch s BSM strategy) Also a 50 percent invested position and 50 percent cash position was taken for the next best three months, and a 100 percent cash position (T-bills) was taken for the worst three months This strategy resulted in a nest egg of $997,620, with a 108 percent annual return, translating into $625,232 more than buy-and-hold Moreover, this strategy had a lower standard deviation and lower maximum 12-month gains and losses In essence, although the switching strategy is less risky than buy-and-hold, the former strategy has returned 27 times the principal of the latter This is an outstanding compromise of risk versus return Investing with margin had been used as a more aggressive strategy during the best months The strategy of 2:1 leveraging consisted of using 50 percent margin during the best six months, as defined in previous strategy number 4, 100 percent invested with
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