Jim, thanks for posing this challenge to the TAer's. While I'm certainly no fan of TA, I sort of agree with Bilow that the bet wouldn't be difficult for someone to win -- as you have framed it.
1. You seem to be staking a lot on the fact that the TAer will pay higher commission costs compared to buy and hold. Commission costs of course are a function of size of trade, and spread. Dell often trades with a 1/16 spread. This means that on 25 in and outs, the TAer will pay 24/16 more than B&H, which gives him only a 1.76% disadvantage (assuming Dell is priced at $85). As for the brokerage cost, that can be a trivial factor if a trade is large and done over the internet
2. Your only other advantage is that the TAer will be out of Dell for periods of time, and only earning interest. The TAer will have the losing position if, as is more likely than not, Dell appreciates during the yr. In the spirit of Bilow's remarks, this disadvantage can be almost completely nullified by the TAer, since he controls how long he wants to be either in or out of the market during the period.
3. Conspicuously absent in your challenge is any mention of taxes. To make it a fair comparison, I would suggest we assume the TAer pays S-T cap gains taxes on any gains while the B&H pays L-T cap gains. Let's assume the TAer is in the .396 tax bracket. Even this is not entirely fair to the B&Her, who will normally postpone taxes for periods much longer than one yr., Nevertheless, it becomes a more realistic comparison to make some provision for taxes. In fact, in an era of declining commissions, it is taxes that generate by far the greatest handicap for TAer.
Thanks again for your post.
Geoff |
