Historical test of $DECK results in 21.8% increase in profit

In a 7 year time frame from January 3, 2006 to December 31, 2012, Decker Corporation [stckqut]DECK[/stckqut] increased 304.7% if you would have implemented a pure buy-and-hold strategy. If you would implemented the strategy that I explain in my book, The Confident Investor, you would have seen a 371.2% return on your investment. This is a 21.8% increase on the profit percentage.

To put it into actual dollars, suppose you invested $10,000 in DECK on 1/3/2006. With the system that is explained in The Confident Investor, you would have exited the market on 12/31/2012 with $60,341.48. With my system, it is not uncommon for you to need a bit more cash available to cover the ongoing trades. Therefore, rather than $10,000, you would have needed $12,806.98 and your actual return would have been 371.2%. You would have 1,288 shares which were purchased with other people’s money and still have your original $10,000.

To be fair in our comparison, the buy-and-hold method if calculated with $12,763.85 would have ended up with $51,826.71 and a respectable 304.7%. You would have purchased 442 shares which had split 3:1 to 1326 shares but your original $12,806.98 would be tied up in the stock.

The profit on the buy-and-hold strategy in this scenario is $39,019.74.  The profit using GOPM (Grow on Other People’s Money) is $47,534.51.  That means the increased profit on DECK in this time frame was $8,514.77. This means your profit INCREASED by 21.8%!!

Understanding buy-and-hold is easy. You have a given amount of money, in this case $12,806.98. You buy 442 shares at the start of the test period. At the end of the test period, you sell the shares and the profit (or loss) is the standard that any other system must beat. In the case of DECK, the stock split 3:1 in the time period.

Understanding GOPM is a bit more complicated without reading my book, The Confident Investor. Before you even start to invest, the system teaches you to look for incredibly well-run companies and only invest in those companies. While DECK may or may not have qualified for this status in 2006, it does in 2013 so we are simply back-testing against a currently well-run company. While past performance doesn’t guarantee future performance, it is probably the best tool that we have to understand investment methodologies.

After you find a well-run company, you are going to buy $10,000 worth of shares when the technical indicators tell you that the stock has upward momentum. You are then going to sell those shares when that momentum slows down or reverses.  The profit that you make on that transaction, you will keep in the stock (in other words, you are not going to sell those shares). You are going to keep the $10,000 ready for when the stock has the correct momentum. If there is any excess profit (e.g. less than the value of a full share after keeping the $10,000) you will just stick that into your money-market account in this example. It is possible that you could invest this excess amount but we are going to simplify this example and just hold that money.

As a quick example, you invest $10,000 in a stock trading at $50 per share so you have purchased 200 shares.  Over the course of the next several days or weeks, the stock price increases to $55 which is where you decide to sell. To get your original capital of $10,000 back, you sell 182 shares resulting in $10,010 in your account and 18 shares that are essentially free since they were purchased with Other People’s Money. You now have your original capital of $10,000, 18 free shares and an additional $10.

Using this technique, you will make several trades per year and may even be trading weekly. Therefore, to make this model fair, I need to account for stockbroker fees and commissions.  In this example, I am using $8 for every sell and for every purchase. You may have a better fee from your favorite broker but $8 seems fair for a test. Frankly, if you are paying more than $10 for each transaction then you probably need to be looking at another broker!

Using this technique, by the end of the test on 12/31/2012 you would have 1,288 shares of DECK that cost you $2,806.98. Those 1,288 shares were acquired for $2.179 per share! This is significantly cheaper than today’s stock price and no matter what happens to DECK you could probably sell these shares for a profit at any time! You would still have the original $10,000 in your bank account! This is because you have purchased these share with Other People’s Money.  This is why I call my system GOPM – Grow on Other People’s Money.

The rest of this article shows each buy and sell transaction for those 7 years. It shows the date, the assumed purchase price on that day (taken from Yahoo – the purchase price is the average of the opening and closing price on that day) and the profit or loss. If you haven’t read my book, The Confident Investor, then you may not understand the timing of the trades. In fact, if you haven’t purchased the book and registered here on this site as a book owner then you won’t be able to see those individual trades. If you have registered and cannot see the trades, make sure you are logged in and refresh your browser.

Which brings me to the big set of questions. Shouldn’t you own this book? Does your investment strategy beat buy-and-hold? Do you even have an investment strategy? If your strategy beats buy-and-hold, does it beat GOPM – Growing on Other People’s Money?

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad. It may be available at your favorite bookstore as well but you may have to ask.

DECK 2006-12

Additional commentary not originally published with this article.
When this article was originally published, the following paragraphs were not included.

At the time that I wrote the article, I hadn’t discussed portfolio management on my site to any great detail. Recently, I discussed the concept of doubling your investment to the point that the free stock is equal to one allotment of your portfolio. Now that this concept has been explained, I need to add another metric to the Deckers analysis.

If you would have invested in Deckers as described in this article, you would have doubled your investment by March 2, 2007. By that date, you would have acquired 150 shares of DECK which were valued at about $67.45 for a total profit of $10,101.75. This means your $10,000 initial investment would have doubled.

This event would have occurred 292 trading days after you initiated trading on DECK. If you followed my advice on portfolio management, you would stop trading in DECK at this point and focus on other stocks to build up equity in them.

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Description of DECK trades table
While it may be obvious the meaning of the various columns, some of them definitely need a bit of explanation if you have never walked through a trading analysis with me.
Date – The date of the trade. It is important to note the long delays between trades. This will help you with your portfolio since you do not have to dedicate your average trade purchase (in this case $10,000) to just one stock but rather you can invest that money in the hottest stock at the time.
Buy/Sell – This is probably pretty obvious. On this date, did the system buy or sell DECK? The SELL will only sell from the previous transaction’s BUY.
Purch. Price – The selling or buying price of this transaction. This is taken from Yahoo’s Historical Pricing page and it is the average of the opening and closing price on that day.
Share – The number of shares that $10,000 will buy on that day.
Invest – The amount that was actually purchased. This is the number of shares (the previous column) multiplied by the Purch. Price column.
Returned – When you sell the shares from the previous BUY, the amount of money that results.
Profit/Loss – How much was profited from the previous BUY.
Free shares – If the SELL was profitable, how many shares was evenly divides into this profit.  These are free shares as they were purchased with Other People’s Money.
Excess – After the Free Shares are taken out, how much money is left over. If the transaction was not profitable, then what was the loss.
Running investment balance – A running total of the value of the investment.

DECK trades table
Date Action Purchase Price Shares Invested Returned Profit / Loss Free shares Excess Running investment balance
1/5/2006 BUY $29.83 335 $9,991.38 $0.00
1/19/2006 SELL $31.09 $10,405.48 $414.10 13 $10.00 $404.11
2/1/2006 BUY $32.62 306 $9,981.72 $424.06
2/7/2006 SELL $31.88 $9,747.28 ($234.44) ($234.44) $414.44
2/22/2006 BUY $32.38 308 $9,973.04 $420.94
3/7/2006 SELL $35.33 $10,873.64 $900.60 25 $17.35 $1,342.54
3/20/2006 BUY $36.86 271 $9,989.06 $1,400.68
4/11/2006 SELL $40.51 $10,968.86 $979.80 24 $7.68 $2,511.31
4/25/2006 BUY $42.51 235 $9,989.85 $2,635.62
5/8/2006 SELL $43.10 $10,119.33 $129.47 3 $0.19 $2,801.18
6/30/2006 BUY $38.28 261 $9,991.08 $2,488.20
7/7/2006 SELL $37.43 $9,761.23 ($229.85) ($229.85) $2,432.95
7/25/2006 BUY $38.06 262 $9,971.72 $2,473.90
8/10/2006 SELL $43.00 $11,256.69 $1,284.97 29 $38.11 $4,041.53
9/8/2006 BUY $42.67 234 $9,983.61 $4,010.51
10/17/2006 SELL $49.56 $11,587.87 $1,604.26 32 $18.50 $6,243.93
11/8/2006 BUY $52.99 188 $9,961.18 $6,676.11
11/24/2006 SELL $54.42 $10,222.02 $260.84 4 $43.18 $7,073.95
12/1/2006 BUY $56.12 178 $9,988.47 $7,294.95
1/4/2007 SELL $58.73 $10,445.05 $456.58 7 $45.50 $8,045.33
2/1/2007 BUY $58.56 170 $9,954.35 $8,022.04
2/23/2007 SELL $63.86 $10,848.20 $893.85 13 $63.67 $9,579.00
3/1/2007 BUY $66.00 151 $9,965.25 $9,899.25
3/27/2007 SELL $72.11 $10,879.86 $914.61 12 $49.35 $11,681.01
4/16/2007 BUY $72.25 138 $9,970.50 $11,704.50
4/24/2007 SELL $73.13 $10,083.25 $112.75 1 $39.63 $11,919.38
4/27/2007 BUY $73.99 135 $9,988.65 $12,060.37
7/11/2007 SELL $101.62 $13,710.03 $3,721.38 36 $63.23 $20,221.39
7/23/2007 BUY $105.68 94 $9,933.92 $21,030.32
7/24/2007 SELL $103.72 $9,741.21 ($192.71) ($192.71) $20,639.29
9/18/2007 BUY $100.87 99 $9,986.13 $20,073.13
10/11/2007 SELL $112.21 $11,100.30 $1,114.17 9 $104.32 $23,338.64
10/22/2007 BUY $112.82 88 $9,928.16 $23,466.56
11/9/2007 SELL $127.50 $11,212.00 $1,283.84 10 $8.84 $27,795.00
11/26/2007 BUY $133.21 75 $9,990.38 $29,038.69
12/31/2007 SELL $157.08 $11,773.00 $1,782.63 11 $54.75 $35,971.32
4/2/2008 BUY $112.68 88 $9,915.84 $25,803.72
4/9/2008 SELL $112.31 $9,875.28 ($40.56) ($40.56) $25,718.99
4/17/2008 BUY $117.26 85 $9,966.68 $26,851.40
4/23/2008 SELL $117.00 $9,936.58 ($30.10) ($30.10) $26,791.86
4/25/2008 BUY $138.85 71 $9,858.00 $31,795.51
5/7/2008 SELL $139.95 $9,928.10 $70.10 0 $70.10 $32,047.41
6/20/2008 BUY $137.21 72 $9,879.12 $31,421.09
7/2/2008 SELL $135.41 $9,741.52 ($137.60) ($137.60) $31,008.89
12/16/2008 BUY $65.36 152 $9,934.72 $14,967.44
1/7/2009 SELL $79.07 $12,010.64 $2,075.92 26 $20.10 $20,162.85
3/24/2009 BUY $49.73 200 $9,946.00 $12,681.15
4/15/2009 SELL $60.73 $12,137.00 $2,191.00 36 $4.90 $17,670.98
6/1/2009 BUY $60.25 165 $9,940.43 $17,531.30
7/2/2009 SELL $69.44 $11,449.60 $1,509.18 21 $50.94 $21,665.28
7/15/2009 BUY $68.89 145 $9,988.33 $21,492.12
7/24/2009 SELL $68.16 $9,874.48 ($113.85) ($113.85) $21,264.36
8/12/2009 BUY $69.37 144 $9,988.56 $21,641.88
8/17/2009 SELL $68.74 $9,890.56 ($98.00) ($98.00) $21,446.88
9/14/2009 BUY $70.91 140 $9,926.70 $22,122.36
10/1/2009 SELL $83.11 $11,626.70 $1,700.00 20 $37.90 $27,590.86
10/14/2009 BUY $87.56 114 $9,981.27 $29,068.26
10/28/2009 SELL $93.40 $10,639.03 $657.76 7 $4.00 $31,660.91
11/9/2009 BUY $95.66 104 $9,948.12 $32,427.05
11/19/2009 SELL $96.75 $10,053.48 $105.36 1 $8.61 $32,893.30
12/4/2009 BUY $97.92 102 $9,987.84 $33,292.80
12/15/2009 SELL $97.52 $9,939.04 ($48.80) ($48.80) $33,156.80
12/28/2009 BUY $98.13 101 $9,911.13 $33,364.20
1/20/2010 SELL $107.73 $10,872.23 $961.09 8 $99.29 $37,488.30
2/24/2010 BUY $101.89 98 $9,985.22 $35,457.72
4/12/2010 SELL $136.41 $13,360.18 $3,374.96 24 $101.12 $50,744.52
4/22/2010 BUY $139.83 71 $9,927.93 $52,016.76
4/30/2010 SELL $145.59 $10,328.54 $400.61 2 $109.44 $54,448.79
6/1/2010 BUY $142.70 70 $9,988.65 $53,367.93
6/22/2010 SELL $158.74 $11,103.45 $1,114.80 7 $3.66 $60,478.04
7/27/2010 BUY $50.94 196 $9,983.26 $58,218.71
8/6/2010 SELL $49.29 $9,652.84 ($330.42) ($330.42) $56,338.47
9/17/2010 BUY $47.64 209 $9,955.72 $54,446.81
9/22/2010 SELL $47.19 $9,853.67 ($102.05) ($102.05) $53,932.46
9/24/2010 BUY $47.39 210 $9,951.90 $54,166.77
10/7/2010 SELL $50.21 $10,535.05 $583.15 11 $30.89 $57,936.57
10/12/2010 BUY $51.35 194 $9,960.93 $59,252.13
10/19/2010 SELL $52.56 $10,187.67 $226.74 4 $16.52 $60,858.69
10/26/2010 BUY $54.55 183 $9,982.65 $63,168.90
12/28/2010 SELL $84.22 $15,403.35 $5,420.70 64 $30.94 $102,910.73
2/7/2011 BUY $82.82 120 $9,938.40 $101,206.04
3/1/2011 SELL $86.25 $10,342.00 $403.60 4 $58.60 $105,742.50
3/30/2011 BUY $86.53 115 $9,950.95 $106,085.78
4/12/2011 SELL $87.74 $10,081.53 $130.57 1 $42.84 $107,650.85
4/18/2011 BUY $92.28 108 $9,966.24 $113,227.56
4/29/2011 SELL $86.03 $9,282.70 ($683.54) ($683.54) $105,552.68
5/26/2011 BUY $90.18 110 $9,919.25 $110,644.73
6/1/2011 SELL $89.86 $9,876.60 ($42.65) ($42.65) $110,258.22
6/30/2011 BUY $87.82 113 $9,923.66 $107,755.14
7/27/2011 SELL $93.59 $10,567.67 $644.01 6 $82.47 $115,396.47
8/1/2011 BUY $101.26 98 $9,923.48 $124,853.58
8/4/2011 SELL $98.03 $9,598.94 ($324.54) ($324.54) $120,870.99
9/8/2011 BUY $90.67 110 $9,973.70 $111,796.11
9/22/2011 SELL $95.05 $10,447.50 $473.80 4 $93.60 $117,576.85
10/7/2011 BUY $100.48 99 $9,947.03 $124,287.58
10/18/2011 SELL $101.96 $10,086.04 $139.02 1 $37.06 $126,226.48
10/28/2011 BUY $114.22 87 $9,936.71 $141,398.17
11/9/2011 SELL $108.14 $9,399.75 ($536.96) ($536.96) $133,871.13
2/8/2012 BUY $86.43 115 $9,939.45 $107,000.34
2/10/2012 SELL $84.40 $9,698.00 ($241.45) ($241.45) $104,487.20
2/16/2012 BUY $87.53 114 $9,977.85 $108,355.95
2/24/2012 SELL $79.33 $9,035.62 ($942.23) ($942.23) $98,210.54
8/15/2012 BUY $45.48 219 $9,960.12 $56,304.24
9/4/2012 SELL $49.04 $10,731.76 $771.64 15 $36.04 $61,447.12
11/27/2012 BUY $35.69 280 $9,991.80 $44,713.31
12/10/2012 SELL $40.90 $11,442.60 $1,450.80 35 $19.47 $52,672.76
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