RocketMan, it is even a losing strategy in a bull market. Allow me to illustrate:
Suppose we make the following assumptions: A buy and holder has a stock that appreciates at the rate of 30% per annum, and does so for 5 years. The capital gains rate is 28%, and the long term capital gains rate is 18%.
So, the after-tax gain after a five year buy and hold would be ((1.3^5)-1)*(1-.18) = 271%(1-.82) = 222.46%. If you annualize that you end up with an after-tax rate of return of 26.385%. Now the momentum player is in and out of the market, so he is paying a 28% tax rate. So just to equal the buy and hold strategy he must earn .26385/(1-.28)=36.65% pre-tax.
Of course that neglects all kinds of real-world impediments to momentum trading, like commissions, bid-ask spreads, and the probability of making incorrect buy/sell decisions.
A friend of mine invested several hundred dollars in one of these highly regraded trading programs (I can't remember the name of it right now), and we set up a bet (the payoff was a bottle of single malt scotch). The bet was that he was restricted to paper trading the stocks that were currently in my real portfolio. He was given a paper account of $250,000 (and paid commissions of $15 per trade, and at the end of the year we would compare results (pre-tax). Of the 12 stocks in my portfolio, I outperformed him (by simply holding) in 11, and in aggregate I doubled his return for the year. Im still enjoying my 18 year old Macallan, but its running low.
TTFN,
CTC |
