Tabell’s Market Letter – January 29, 1971

,— —————……., TABELL'S MARKET l LETTER – – —–J 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 OIVISION OF MEMBER NEW YORK STOCK EXCHANGE MEMBER AMERICAN STOCK EXCHANGE – January 29, 1971 It is an oft-voiced criticism of the military establishment that generals are invanably superbly prepared to fight the last war. The failing, however, is a human one and hardly restricted to the military. It is at least' an arguable premise that investors also equip themselves to wage the investment battles of the past, ''giving'little'thought as-to 'how-the-future environmentmaydiffer frompast-ex-perience- 'I'hus,–manycin- – –' vestors may be entering the 1970's superbly equipped to cope with the environment of the 1950's and 1960's. This proved somewhat expensive in the 1969-1970 bear market,and it may, we have a feeling, prove to be expensive in the future. The tendency to look backward is not a new one, as anyone with a decent financial library and an in- clination to browse through it will be aware. Twenty years ago, in the early 1950's and late 1940's, in- vestment theorists, still scarred by the memory of the 1929-1932 depression, devoted a great deal of in- tellectual energy to devising plans by which portfolio managers could avoid a repetition of that disaster. One method, widely advocated at the time, involved the use of so-called formula plans or plans under which switches were made between cash and stock in accordance with a pre-determined formula. The plans had one difficulty, however. Unprepared to cope with the rising markets of the 1950's and 1960's, they tended to take their us ers out of the market early in that rise and, as stocks continued to advance, they fell into total disrepute. This is illustrated by the table below which contrasts the percentage results of investment in the DJIA via a typical formula plan — the constant -dollar plan — with the policy of Simply buying and ho1dmg the average. The constant-dollar plan is a Simple one whereby the market value of stocks in an account is maintained at the same level each month, by purchases if the market has fallen during the month or by sales if the market has risen. The table shows the various dates at which an mvestor could have started such a plan since 1926 and the results for each of four termination years, 1945, 1955, 1965 and 1970. In each instance, the number to the left of the slash is the percentage change achieved in an account by buying and holding the Dow, and the number to the right is the percentage change under a constant- dollar formula. -Start E-N D Date 1945 1955 1926 22/100 210/201 1927 – 4/ 73 141/174 1928 -35/ 31 62/132 1929 -22/ 44 96/145 1930 17/ 81 196/181 1931 147/142 526/242 1932 22V152 714/252 1933 93/ 89 388/190 1934 85/ 83 369/184 1935 33/ 50 238/150 1936 7/ 27 171/127 1937 59/ 64 304/164 1938 24/ 32 215/132 1939 28/ 32 225/132 1940 47/ 42 272/143 1941 73/ 58 340/158 1942 61/ 50 309/150 1943 41/ 36 259/136 1944 26/ 24 220/125 1945 153/100 — -1946 175/107 1947 169/105 j)-A-r—E 1965 1970 516/276 433/267 378/249 314/240 223/207 179/198 290/221 237/211 488/257 409/248 1144/318 976/308 1517/328 1299/319 870/265 739/256 831/260 706/250 572/226 482/216 438/203 366/193 702/240 594/230 526/208 442/198 545/208 458/198 639/218 539/209 773/234 656/224 711/226 602/216 613/212 517/202 536/200 450/191 402/176 334/166 446/183 373/173 435/180 363/171 Start Date 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 E- – N 1955 175/105 144/ 93 107/ 76 81/ 62 67/ 53 73/ 57 20/ 19 DDA T' E'' 1965 1970 446/181 373/172 384/169 319/159 311/152 256/142 260/138 211/128 232/129 187/119 245/132 198/123 139/ 95 107/ 85 98/ 75 71/ 66 94/ 72 67/ 62 122/ 85 92/ 75 66/ 55 44/ 46 42/ 39 23/ 30 57/ 48 36/ 39 32/ 31 14/ 21 48/ 40 28/ 31 27/ 24 9/ 14 10/ 10 4/ I – 13/- 9 6/ 10 , .., 71.-4,,– 'O. 11/- 9 4/ 6 The first column suggests the reason for the vogue of formulas in the late 1940' s. It shows that a con- stant-dollar plan formula would have enabled the mvestor to avoid the risk of buying at the top m the late 1920's and would have, in 1945, given him a proht rather than a loss even had he started the plan at that time. The formula, in fact, produced results superior to buy/hold in 10 of the 19 starting years up to 1945. However, as the second two columns show, the experience ending with 1955 and 1965, was qUIte different. A glance at the figures mdlcates that the investor, whenever he started his fund, would have been better off simply by buying stocks and holding them rather than operating under the formula. It is, however, the last column showing results ending in 1970 which is of interest. For starting years from 1926 through 1955, the policy of buy and hold tends to be clearly superior. However, in the middle 1950' s that superiority erodes and, as the table shows for every starting year since 1958 the investor would have fared better under a constant-dollar plan t\-ian under a plan of SImply holdmg stocks. Ihe wheel, in other words, may have come full circle. The long ago-discarded concept that portfolIO policy should center on aggressive switching between stocks and cash may again have a great deal more validity than many analysts now suspect. ANTHONY W TABELL Dow-Jones Ind. (1100 a.m.) 865.42 DELAFIELD, HARVEY, TABELL SAWT.t-l prcsslon..o slalemen( or of opinion or any other mottcr hercin contomcd IS, or IS 10 he deemed to be, directly or indirectly, an offer or the SOllcltollon of an xMto buy or sell any seCUrity referred 10 or mentIoned The mailer IS presented merely for the convenience of the suhKJlber WhIle we believe Ihe sources of our mformolton to be relloble, we In no woy represent or guarantee tile acc;urai)' tllereof nor of the statements made Ilerem Any action to be taken by the sub- SCriber should be based on hIS own Inveshga\ian and Information Montgomery, Scott & Co, as a limited partnership, and Its portners or employees, may now have, or may later take, positions or trades in resRcct to any seCUrities mentioned In Ihl or any future Issue, and such pOliti on may be different from ony views now or hereafter expressed In thl or any other Issue, Montgomery, Scott & Co, which IS regltered With 'Ile SEC as an Investment advisor, may give advice to 11 Investmenl adVisory and other customers 'Independently of any statements mode In IIlls or In any other issue