Answering the long-standing question: what if I just bought and held?
by Roger Otting
This article was originally published in the February 2021 monthly newsletter.
A recent note to The Bowser Report asks: “Clean Energy Fuels (CLNE) has moved above $8 per share; did I sell too early?”
This is an excellent question that addresses a larger issue: What if you don’t follow the Bowser Game Plan, and more specifically, the Selling Plan?
This article attempts to address whether the Selling Plan or buying and holding yields greater profits.
The Selling Plan
“5. SELLING PLAN: Sell half of your holdings when the stock doubles from your purchase price. Sell the remainder after the stock drops 25% from its most recent high. If the stock drops 50% without doubling, sell all shares.”
The Selling Plan’s two components include selling the stock at various stages of profit or selling the stock at a specific point of loss. The first of these, selling half the position when a stock doubles (and the other half on a price retreat) has a psychologically soothing effect. By selling half the position upon the double, risk of loss is off the table. The remaining shares are “house money.” In other words, no matter how badly the remaining shares perform, you will not lose money overall.
The sale of shares on the retreat from the recent high as well as the sale of shares on a 50% drop is an homage to the second half of an old Wall Street axiom to let your winners run and cut your losses short.
I recently completed a study of Bowser picks from 2017 – 2019 to answer the following questions:
- How did the Bowser Game Plan work when compared to a simple buy-and-hold plan?
- How did it do compared to an index of small-cap stocks (IWM)?
I used the following methodology to examine the performance of each pick and the total portfolio of 36 stocks:
Each monthly pick was assumed to be purchased at the closing price of the last trading day of the month in which the newsletter was published.
- I assumed an initial investment of $1,000 with share count rounded to the nearest whole share, less commissions.
- The Selling Plan was followed. All trades were assumed to occur at the closing price on trading days. Stocks unsold as of December 31, 2020 are valued at the closing price for that day.
- Dividends were calculated and accounted for as additional Proceeds from Sales.
- Commissions were assumed to be $5 per trade.
- The buy-and-hold strategy assumed all picks were purchased on the last day of the recommendation month and held until December 31, 2020 UNLESS the stock was bought out, merged or otherwise delisted before that.
I’ll introduce the results first, and then discuss the key takeaways. Here is a table of observations from the analysis:
- Internal Rate of Return (IRR) based on all cash flows from investment transactions. The IRR is used by analysts to assess the return on cash flows with non-periodic schedules.
- Following the Bowser Game Plan allows for lower cash investment as Proceeds from Sales of prior investments are used to fund purchases of subsequent stocks.
- Includes dividends and Proceeds from Sales of positions during the holding period.
- Total unrealized gain/loss of unsold positions.
Although holding the positions and ignoring the plan resulted in a larger total value ($69,856 versus $58,045), this came at the cost of significantly higher capital requirements (an additional $17,804 out of pocket would have been required).
This led to a far greater total return for the Bowser portfolio versus the buy-and-hold portfolio (359% versus 106%). Because of the Bowser Game Plan’s exit strategy, the portfolio became self-financing in just over 16 months.
Another way to look at the return is on an annual basis. Following a buy-and-hold strategy yielded investors a whopping 33% annual Internal Rate of Return; not bad. However, following the Bowser Game Plan yielded an annualized IRR of 39%!
The key takeaway here is that your money earned, on average, an additional 6% PER year and did so on $17,804 less cash out of pocket.
Profit Per Day
I found that the main contributor to the varying return percentages for the Bowser Plan versus the buy-and-hold plan was the average profit per day.
As an example, under the buy-and-hold plan, if an investor bought One Group Hospitality (STKS) on January 31, 2017 and held it until December 31, 2020, he would have a profit of $1,160 over 1,430 days. That represents a profit of $0.81 per day for the holding period.
Following the Bowser Game Plan, the investor would have sold upon the double and then upon a retreat. This would have yielded a profit of $786. However, this was earned in a substantially shorter period of time, resulting in a profit per day of $1.16.
The average profit during the analysis period for Bowser picks was $1.38 per day for a buy-and-hold strategy versus $1.60 following the Bowser Game Plan.
In other words, the Selling Plan results in a shorter holding period and more profit per day, which allowed each dollar invested to earn more with the Bowser Game Plan.
Comparison to a Small-Cap ETF
I next compared the results of the cash flows from our analysis with the results that would have been generated had they been invested in the iShares Russell 2000 ETF (IWM), a well-known small-cap exchange traded fund.
Unhappily for investors in the ETF, their annual IRR was only 14%. Any profit is better than losing money, but this paltry return pales considerably next to the Bowser Plan’s 39% annual IRR. In addition, average profit per day was just $0.33, $1.05 per day less than the buy-and-hold strategy and $1.27 less than the Bowser Game Plan.
Of course, your results may vary. Purchase day, brokerage commissions, execution price and sale dates could all be different. One day’s difference in purchase timing could alter the time until your investment doubles. However, the results are clear: sticking to the Bowser Game Plan yields better results than both a buy-and-hold strategy or investment in a small-cap ETF.
Our investing partnership has been very happy with the returns generated by following the Bowser Plan, and we intend to remain loyal subscribers.
In summary, good companies purchased at good prices yield good results. Good companies at good prices with a disciplined selling plan yield great results.
Roger is a long-time subscriber and occasional contributer to The Bowser Report.