Following the assumptions I posted the other day, I have finished a full 1974-2003 backtest using the TTD methodology. The backtest is for January starts only. In this post I will outline the summary results as well as an example to make clear the procedure. In another post I will provided the detailed data. As stated previously no earnings test was included at this time.

Year    All Ret  Top 5 Ret  Top 3 Ret  Dow 30
  1974    0.895      0.966      0.953   0.844
  1975    1.470      1.698      1.846   1.442
  1976    1.296      1.274      1.369   1.294
  1977    0.876      0.878      0.895   0.874
  1978    1.031      1.054      1.031   1.025
  1979    1.123      1.054      1.085   1.113
  1980    1.237      1.304      1.275   1.253
  1981    0.992      1.115      1.162   0.967
  1982    1.229      1.259      1.195   1.195
  1983    1.268      1.273      1.410   1.356
  1984    1.038      1.083      1.029   0.999
  1985    1.310      1.290      1.457   1.321
  1986    1.397      1.121      1.301   1.234
  1987    1.166      1.168      1.035   1.158
  1988    1.148      1.148      1.135   1.137
  1989    1.230      1.268      1.356   1.320
  1990    0.870      0.870      0.784   0.909
  1991    1.201      1.325      1.339   1.304
  1992    0.917      0.984      1.019   1.110
  1993    1.238      1.203      1.242   1.179
  1994    1.121      1.078      1.121   1.037
  1995    1.330      1.414      1.449   1.367
  1996    1.282      1.297      1.302   1.243
  1997    1.436      1.196      1.167   1.223
  1998    1.056      1.061      1.157   1.159
  1999    1.046      1.208      1.481   1.185
  2000    1.349      1.364      1.349   0.955
  2001    1.060      1.108      0.902   0.969
  2002    0.901      0.926      1.011   0.845
  2003    1.288      1.330      1.397   1.266
 
  CAGR     14.7       16.5       18.9    13.1
   GSD     16.5       15.9       20.1    16.3
Sharpe     0.52       0.62       0.62    0.44

All Ret is the return when purchasing an equal share of all stocks that are priced under their downside.
Top 5 Ret is the return when purchasing an equal share of the 5 stocks that are most under their downside or closest to their downside.
Top 3 Ret is the return when purchasing an equal share of the 3 stocks that are most under their downside or closest to their downside.
Dow 30 is the return if you bought an equal share of every stock in the Dow. This is a better baseline then the DJIA, since it includes dividends.
Note: In 1999 no stocks qualified, so the 1 Yr Tbill rate was used as the return for All Ret column.

Here's an example of Caterpillar from its last report in 1995

Data Date      11/10/1995
Symbol                CAT
Price 12/31/95      58.75 (close)
Price 01/02/96       59.5 (close)
 
                     1985    1986   1987   1988   1989   1990   1991   1992  1993  1994  1995  1996  1999
Low Price            14.5    18.3   19.9   26.9   26.4   19.1   18.8   20.6  26.9  44.4  48.3
Hi Price             21.6    27.7   37.4   34.3   34.5   34.3   28.8   31.1  46.6  60.7  75.3
Cash Flow                                                                                 8.7   9.5 
Cap'l Spending                                                                           4.95  4.95 
Book Value          15.59   15.93  17.58  20.28  22.06  22.50  20.04   7.80 10.79 14.52 18.75 22.95 37.65
ROE                   6.7     5.7    9.8   15.0   11.1    4.6 NMF    NMF     31.0  32.8  29.5  25.5  20.0
 
                 EPS-4Q   EPS-3Q  EPS-2Q EPS-1Q EPS+1Q EPS+2Q EPS+3Q EPS+4Q 
Earnings             1.38    1.50   1.62   1.07   1.31   1.50   1.50   1.20
 
Downside       
12/31/1995          53.48
1/2/1996            54.25

The downside changes because on 12/31/1995, I used 1995 BV and ROE as the estimates and used 1985-1994 as my 10 year baseline. On 1/2/1996, I used 1996 BV and ROE as the estimates and used 1986-1995 as my ten year baseline. This the downside I used for this test. In the future I will be able to produce a backtest that uses the most recent estimates regardless of the year's date.

- Lee