Workshop Portfolio Beating the Market for 30 Years

Backtested data for many of our Relative Strength screens now goes back an additional 15 years to 1969. The RS screens have beaten the market consistently throughout this new period. We are now very confident that Relative Strength is a valid stock screening criteria that correlates well with stock performance.

By Moe Chernick
August 8, 2000

The Relative Strength (RS) strategies are some of the most basic yet powerful strategies developed in the Workshop. The RS-26 week stock screen simply selects the five Value Line Timeliness 1 stocks with the highest total return for the past 26 weeks. The RS-13 screen ranks stocks by 13-week total return instead of the 26-week return. Both of these screens, when rebalanced monthly, have produced incredible returns.

Thanks to the work of Peter Kuperman, who put together the data that allowed us to test these screens from 1969 through 1985, we now have a 30-year history for the RS-screens. Here are the results:

Strategy    CAGR 1969-85   1986-99  1969-1999
RS-26 Week      18%          51%       32%
RS-13 Week      16%          59%       34%
S&P 500          9%          18%       13%

As you can see from these results even during the new period these two RS monthly screens handily beat the S&P 500. This is significant because the new data shows that the astounding outperformance that we saw during the initial backtest was not a statistical fluke.

Now, let's look at this screen using the same three time periods I used for Keystone. The bear market years of 1969-1974, the mixed bull market years of 1975-1994, and the roaring bull market of the last five years. Here are the results by these periods:

              Bear    Mixed Bull  Roaring Bull
Strategy    1969-74    1975-94      1995-99   
RS-26 Week    2%         29%          98%
RS-13 Week    9%         28%          89%
S&P 500      -4%         15%          29%

As you can see the results are extremely impressive. Even during the bear market these screens ended up with some nice gains and during the recent roaring bull these screens exploded. I find in particular the 1969-1974 results very impressive. While it does not surprise me that the RS screen would explode during a roaring bull, I would expect the screens to loose big in a bear market instead of actually making money.

So should an investor just go running out and start investing in these screens? It is certainly something to think about, but before doing so there are some negative points you should also consider:

1. These screens are costly. They require frequent trading with all of the attendant commission and spread costs. If your portfolio is still small, or if you aren't using a deep discount broker, these costs could significantly reduce your returns. In a roaring bull market the costs might not seem like much, but in slower markets the costs can easily eat up all the benefits of using the screen.

2. These screens are extremely volatile. The Geometric Standard Deviation (GSD) for the RS-26 screen over the entire period is 41% while the GSD for the RS-13 screen is 45%. If you are investing in these strategies there will be bad times along with the good. If you can't stomach loosing a third of your money in one to two months, these screens are probably not for you.

Now there is one last piece of good news for those who like the results of these strategies and are willing to put up with the volatility but cannot afford the cost of trading every month. The new results also show great results for these screens when traded four times per year. Next week, I will look at the quarterly returns and discuss whether quarterlies or monthlies are the best way to go.

Until Next Time, Fool On!