Reading through the classic textbook, Technical Analysis of Stock Trends, last night I stumbled upon a stunning stat comparing the returns of a strategy using Dow Theory versus buy and hold.

Using Dow Theory buy and sell signals would have turned an initial investment of $100 in 1897 into $492,597.38 by the end of 2010.  This compares to a buy and hold strategy of $25,952.72, which even assumes buying the Dow low at 29.64 and selling at December 2010 close.

Of the 41,444 days from 1897 to 2010, the Dow Theory investor would have been on the sidelines 14,378 days, or 37 percent of the time.  A nice place to be given some of the epic bear markets over the past hundred years.  Imagine watching your portfolio evaporate during the “Hoover drawdown” of 1929-32 with the Dow falling 89 percent.  No thanks!

Even more impressive is the return on trading both sides of the market, both long and short, using the Dow Theory buy and sell signals.   This strategy would have turned the initial $100 investment in 1897 into $2,697,535.01 by the end of 2010.

The data ignores reinvestment and dividends.   Stunning, nonetheless!

Source:    Technical Analysis of Stock Trends



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Category: Dividends, Technical Analysis

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8 Responses to “Dow Theory or Buy and Hold?”

  1. JohnathanStein says:

    If my math is right, am apples-to-apples comparison in Compound Annual terms would be:

    5.0% Buy & Hold
    7.8% Dow Theory, Long only
    9.4% Dow Theory, Long & Short

    In the FWIW Dept., Jack Schannep is the best performing Dow Theorist; he claims the following at, since 12/31/53 (59 years):

    10.4% Buy & Hold
    11.6% Dow Theory, Original, Long only
    13.8% Dow Theory, adding use of S&P 500 index, Long only

  2. The apples-to-apples comparison looks correct. The Dow Theory manages to outperform buy and hold by ca. 2% a year. However, this is, to some extent, immaterial. What’s really important is the reduction of drawdowns. When the market experienced bear markets erasing ca. 50% of the investor’s equity, the Dow Theory managed to get investors out of trouble in pretty good shape (i.e. largest loss not exceeding 20%).

    Schannep’s Dow Theory did even better, though.

    Johnathan is right. Schannep’s Dow Theory clearly outperforms the “classical” Dow Theory both in terms of reward and, more importantly, risk (still lower drawdowns, thus the largest recorded loss amounts to just 10.45%). Here is an in-depth comparison of Schannep’s Dow Theory versus the “classical” one (which is also an excellent timing device):

  3. san_fran_sam says:

    And if you were say 25 years old in 1897 to invest in the Dow, then in 2010 you would have been 138 years old. so good luck with that.

    and then to riff on JS’ comment. good luck finding someone who knows what they are doing when it comes to implementing the Dow Theory. Lots of practiioners out there who claim to be Dow Theorists. And plenty more who counterclaim that they are not.

    • JohnathanStein says:


      No need for luck; I found the main three a decade ago on the web. Richard Russell, Richard Moroney and Jack Schannep, all of whom had been practicing for a long while. In my opinion, Russell has been at it the longest (but had the worst record), Moroney was fair-to-middlin’ (but short on detail, while also offering a stock picking system named “Quadrix”), while Schannep mostly sticks to his knitting, offering both an original interpretation (DJU and DJT) as well as one which adds the S&P 500 (SPX).

      Implementing is simple: You are in or out, using a whole-market ETF (SPY) or mutual fund (VFINX). Uh, IIRC, last time I ran the numbers, Vanguard’s offering underperformed the index by 0.1%, about half its’ Expense Ratio…

  4. One remark concering the “short side” of the Dow Theory:

    While the “short side” (i.e. going short when there is a “sell signal,” instead of going to cash) of the Dow Theory increases performance, it does so at the expense of increasing risk. The number of losing trades (i.e. failed shorts) increases and the profit factor, albeit larger than one, degrades.

    Furthermore, since one would be short ca. 1/3 of the time, rea-life profitability would be impacted by the sizeable amount of dividends to be paid to the lender of the stocks shorted and shorting fees.

  5. Non Sequor says:

    Sorry, but any long term analysis of returns without accounting for reinvestment of dividends is worthless. If you’re pulling dividends out of your portfolio then you’re doing so in lieu of selling stock as you would have to do if those stocks had not paid dividends.

    If you don’t account for this, the strategy comparison also implicitly includes a comparison of spending habits in the form of income pulled out of the portfolio.

    • Fair enough!

      What really separates buy and hold and the Dow Theory is draw down reduction. It is different to suffer a -50% loss (1974, 2000, 2008-2009) or -89% (1929-1932) than containing your losses to -20% (classical Dow Theory) or -10% (Schannep’s). While nobody can predict the future, it seems more likely that looking forward the Dow Theory will continue doing a good job at cutting losses short when most needed. Furthermore, such loss containment is likely to be effective in the future, given the nature of the Dow Theory setups and trailing stop.

      Furthermore, since the Dow Theory remains invested in the market ca. 2/3 of the time, only 1/3 of thedividends accruingto buy and holders would be lost to those following the Dow Theory(andthecash would have paid interests in the past).I am willing to forgo 1/3 of dividends as a trade-off for drawdown reduction.

      San_fran made a valid point: nobody can live 125 years. Draw downs kill the real investor who doesn’t have either the staying power or the psychological fortitude to endure -50% losses, even though they may be temporary. Thus, in the real world, it is vital to contain losses, and to avoid severe draw downs. I really don’t care about the Dow Theory higher returns (which if one includes 2/3 of dividends really outperform buy and hold), I do care about keeping the powder dry.

  6. A very interesting article and excellent timing as the UK investment magazine Investors Chronicle (published by FT) have just published a different switching strategy versus the Dow going back to 1897 showing $1,000 being turned into $4.98m (long/cash) and $31.7m (long/short). The best bit is there is no guess work as it uses the seasonal cycle (30 Apr/31 Oct) with specific buy/sell years.

    Unfortunately the article is subscriber only but I thought I’d mention it as it too avoids the big bear markets.