Learn the stock market › Test a strategy › Lesson 3 of 5
Did the rule beat buy and hold?
The rule on each company
The rule is the one from the first lesson: own the stock while it closes above its 200-day moving average, otherwise don't. It is compared with buying the same stock on the same day and holding it.
| Company | Buy and hold | The rule | In the stock |
|---|---|---|---|
| AMD | 13.1% | 19.6% | 55% |
| Netflix | 30.8% | 35.9% | 69% |
| Nvidia | 29.4% | 33.9% | 71% |
| Palantir | 46.0% | 47.7% | 62% |
| Apple | 31.0% | 28.6% | 75% |
| Meta | 25.4% | 22.5% | 77% |
| Exxon Mobil | 8.6% | 4.7% | 63% |
| Oracle | 5.8% | 1.6% | 64% |
| Alphabet | 18.7% | 14.4% | 76% |
| Berkshire Hathaway | 11.0% | 6.6% | 75% |
| Microsoft | 14.6% | 9.7% | 68% |
| Eli Lilly | 14.0% | 7.2% | 68% |
| JPMorgan Chase | 11.9% | 4.3% | 66% |
| Mastercard | 24.0% | 15.2% | 82% |
| Costco | 16.2% | 7.1% | 75% |
| Amazon | 23.3% | 14.0% | 68% |
| Walmart | 10.3% | −0.3% | 67% |
| Visa | 22.2% | 10.5% | 81% |
| Broadcom | 38.5% | 22.2% | 83% |
| Tesla | 41.2% | 17.0% | 63% |
The rule beat holding in four of 20: AMD, Netflix, Nvidia and Palantir. Those stocks had a long, deep fall, like AMD at −96% at the worst. The rule sold on the way down and avoided a large part of it.
Why the rule fell behind
In the middle, the rule owned the stock 69% of the time. The rest of the time the money sat outside, and these companies have risen a lot over the years. The rule also sells only once the price has already fallen some way and buys back only once it has risen some way, so it loses a little on every round trip. When a stock mostly goes up, that is enough to leave it behind.
Smaller falls
What the rule usually gives is smaller falls. The largest fall was smaller with the rule in 15 of 20 companies, and in the middle it was −51% against −65%. A smaller fall needs a smaller rise to get back, as the lesson on how much you can lose works out, so it is worth something even when the return is lower. Whether it is worth it depends on what you can bear to watch.
On a whole index
The companies above are today's largest, which means they came back after every fall. That favors holding. On the S&P 500, where nothing has been sorted out, the rule returned 6.9% a year since 1928 against 6.1% for holding. The largest fall was −54% with the rule and −86% for the holder.
There the rule beat holding, before costs. But the index counts without dividends, and the money outside earns no interest. Dividends would have favored the holder, interest the rule.
The rule made 589 buys and sells. What commissions and tax do to the result is in the lesson on costs and tax. How stocks moved from days above and below the average, instead of a rule that buys and sells, is in the lesson on the 200-day moving average.
Test yourself
The rule made less than holding in most companies. Does that make it pointless?
More numbers are on the AMD page.