Beat the Market - A Strategy for Conservative Investors

Abstract

A method is devised for the conservative investor in equities that harvests most of the potential gain in bull markets while avoiding most of the pain in bear markets. The method makes no use of short sales or option trading and focuses on a buy-the-market and hold strategy when measured volatility is low. When this condition is violated, a moving average look-back (MALB) algorithm is employed which has the investor in a long position at day n if and only if the ratio of the k-day moving average at day n-1 to the same average at day n-m-1 exceeds the rate of interest that could have been obtained in the period n-m by being in a cash position.

The method was tested against three of the most popular large cap exchange traded funds (ETFs) that track major U. S. equity indices with growth, blend, and value styles. The parameters k and m were chosen by calibration against QQQQ data from the inception of this fund on 3/10/99 through 9/30/97, which includes the rapid rise and fall of the NASDAQ in the period of "irrational exuberance", but not the steep drop in the equity markets that subsequently occurred. Then the parameters were frozen and applied to the data for SPY, and DIA, each from their inception through November 2008. The results indicate that the method is largely successful in achieving the stated goals.