Saturday, September 21, 2013

Dow Theory Special issue: Visualising drawdowns

Buy and hold versus Schannep’s Dow Theory

An image is worth than thousand words. I have profusely written on this blog about the excellent job Schannep’s Dow Theory does at containing losses.

Well, today I won’t give stats. Just three charts (created by courtesy of TradeStation ®) which are self-revealing.

The first chart is the Dow Industrials from 1/02/1953 to 09/20/2013. It epitomizes the “buy and hold” philosophy. As you can see the drawdowns are hair curling. Would you have survived (both financially and mentally) such drawdowns in real life?

Industrials: Buy and Hold. Drawdowns destroy the real investor

The second chart is Schannep’s Dow Theory during the same time period on a non-capitalized basis (each position with same starting capital of 100 K USD). You don’t need to be a market guru to realize that risk (draw downs) are contained.

Industrials: Schannep's Dow Theory. Drawdowns contained

The third chart is Schannep’s Dow Theory on a capitalized basis (which is the closest thing to reality and the proper "apple to apples" comparison with buy and hold). Since the chart is non-log, drawdowns appear larger than they really are, as the compounded profits mount. The chart shows a compounded profit north of 14 million dollars (with a starting capital of 100 K USD) versus the more modest 5.3 millions made through a “buy and hold” approach during the same period with the same starting capital. 

Schannep's Dow Theory on a compund basis. Profits explode. Drawdowns contained

I will just give you two pieces of data to highlight the net solidity and outperformance of Schannep’s Dow Theory:

a)    Largest loss: -10.45% .
b)   Deepest drawdown (caused by largest string of 3 consecutive losing trades): -19%

Now it is up to you dear readers to draw your conclusions.

Have a nice weekend

The Dow Theorist      

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