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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: StockHawk who wrote (25396)	5/26/2000 10:03:00 PM
From: mauser96	Read Replies (1) of 54805

There's been a lot of talk on this thread about LTB&H, so I thought some hard data here might be useful. I'm re reading a book "Fractal Market Analysis" by Edgar E. Peters and this comes from that source,page30. The Sharpe ratio is one showing the amount of return per unit of risk or standard deviation.The higher the ratio, the less the risk (by this methodology). The author studied this for a 100 year period ending in 1990 for the Dow Jones Average. For periods of 1 day to about 1200 days there is a slight but steady decline of the Sharp ratio, with the average being somewhere around 1.14 or so. After 1200 day periods the ratio starts to increase.. The real surprise is 6500 days where the Sharpe ratio reaches 4.62. As an example, going from 65 days to 6500 days, decreases the risk by more than 400%. Going from 65 days to 650 days decreases risk by about 9%. Long term investors are rewarded better per unit of risk. The figures are a bit erratic because of the "short" time span, but what it shows is that for long term to really substantially reduce risk the holding term may have to be many years. One should also keep in mind that the DJI has not stayed static during that time. Stocks have been dropped and added. However I suspect the methodology of choosing stocks for the DJI hasn't changed a lot. They want leaders that are mature companies in important industries. I would suspect that the same effect would be true with a gradually changing portfolio of gorillas. An interesting part of the chart is that the Sharpe ratio tends to be a bit higher for periods of 8 days or less than it is for periods of a few months. This could be because the market has "memory" of past events , but the "memory" doesn't last for long. BTW, this book is fascinating reading for students of market behavior.

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