Brad, I haven't read the book. Did it factor in tax effects. This can be a major differential between the two strategies that is often neglected in analyses. I don't recall having posted this effect on this thread, so if I have, please excuse the redundancy.
Assume you have a buy and hold strategy for a stock purchased 10 years ago, and that stock has appreciated at 20% per annum, so your total gain has been 519.174%. Let assume that you are in the 28% tax bracket, so now your after tax gain is 373.805%. On an annualized basis, this works out to 16.832%.
By contrast, suppose you use a timing strategy that results in the same after transaction costs appreciation rate - 20%. But because of the annual tax bite, that rate is reduced to 14.4%. In order to achieve that 16.832% after-tax effective rate, the trading strategy would have to achieve a 23.3778% pre-tax rate!
The bottom line is this, all other things being equal, the buy and hold strategy out-performs the timing strategy because of the effect of what amounts to a non-recourse, interest-free loan from the government. And this analysis doesn't even take into account the effect of reduced long-term capital gains rates, which would expand the difference significantly.
Regards,
Paul |
