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Author: LLackey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5970  
Subject: Jan Start, Annual Hold backtest Date: 5/30/2005 11:03 PM
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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
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