Fool.com: Thirty Years of Great Returns [Workshop] April 11, 2000

Workshop Portfolio Thirty Years of Great Returns
The relative strength screen

By Moe Chernick
April 11, 2000

Thanks to the hard work of many Workshop contributors, particularly Peter Kuperman, 30 years of historical returns data is now available for many of our Workshop strategies. The results show that since 1969 all of the relative strength (RS) screens have easily outdistanced the S&P 500, often by as much as a 2-to-1 margin.

Let's take a look at the new numbers from 1969-1985. (Note: The numbers I am using in this article were put together by MI contributor cybersol. Click here to see the complete post. Thanks, cybersol!)

The four strategies compared below are based on a relative strength screens as described on the Workshop Screen Explanations page. All start with the top 100 stocks ranked highest for "timeliness" by Value Line. Those 100 stocks are then sorted by total return over the past 13, 26, or 52 weeks, and the top five stocks are purchased and held for the specified period. The RS-O strategy selects only stocks that appear on both the RS-26 and RS-13 lists. The returns given are the compounded annual growth rate (CAGR) averaged for multiple portfolios started at different times of the year.

1969-1985 Results (S&P 500 return -- 8.88%)
Screen    Monthly  Quarterly   Semi-Ann.   Annual
RS-52      17.8%     21.7%      20.7%      15.2%
RS-26      17.5%     20.4%      21.6%      17.0%
RS-13      16.2%     23.5%      19.5%      16.0%
RS-O       22.1%     25.2%      23.1%      18.3%

These numbers show us that throughout the new testing period, the RS concept works. This is significant for a number of reasons:
  1. We now have 30 years of evidence that these screens work.

  2. We now have 17 years of additional data that was not available when the original strategies were tested. This gives us strong confidence that our results were not achieved by data mining, which in turn gives us confidence that these strategies should continue to work in the future.

  3. This new data is from an era when the stock market was not exploding like it has been for the last 10 years, so we can see that even in down and mixed markets the RS screens beat the market by a wide margin over the long haul.
Now, let's look at the previously available 1986-1998 data to see how it compares:
1986-1998 Results (S&P 500 return -- 17.82%)
Screen  Monthly  Quarterly  Semi-Ann.  Annual
RS-52    43.0%     39.3%     35.0%     28.4%
RS-26    39.7%     39.0%     35.5%     30.2%
RS-13    45.6%     30.7%     30.3%     28.4%
RS-O     46.9%     34.5%     32.4%     28.8%
Comparing the two time periods is interesting:
  1. In both periods, shorter-term strategies outperformed strategies that held stocks for longer periods. From '69-'85, quarterly holding periods worked best while from '86-'98, monthly renewals worked best.

  2. RS-O is the best monthly strategy in both time periods.

  3. RS-O and RS-13 were the best quarterly strategies during the '69-'85 period but the worst from '86-'98.

  4. In general, as you go from shorter to longer holding periods, there is a drop-off in returns, although the annual returns are still quite impressive. The one exception is that during the earlier time period, returns were uniformly better for quarterly holds than for monthly holds.
Finally, let's look at the full 1969-1998 period:
1969-1998 Results (S&P 500 return -- 12.67%)
Screen    Monthly    Quarterly   Semi-Ann.    Annual
RS-52      28.1%      29.0%      26.7%      20.7%
RS-26      26.7%      28.1%      27.4%      22.5%
RS-13      28.1%      26.4%      23.8%      21.2%
RS-O       32.3%      29.2%      27.0%      22.6%
The champion in all three periods is the RS-O monthly, but what is really remarkable is that ANY of these strategies would have beaten the market by a margin that most investors can only dream about. One thing that is not shown in these tables is that the relative strength strategies have also worked exceedingly well since they were discovered, another important criterion for judging the reliability of a mechanical screen.

So should you run right out and invest in relative strength screens? It's tempting, but first you need to be sure you understand them and that you can devote a large enough portion of your portfolio to them so that you don't get eaten alive by trading costs. Also remember that RS screens are very volatile and you should not invest in RS screens unless you have the stomach to take big losses. For example, my personal RS-O monthly portfolio went down over 18% for the two weeks that ended on April 7. For the year this port is still up over 13%, but if you can't take a 20% or higher loss in a very short period, then RS screens may not be for you.

Until next time, Fool on!