Alpha Power Investing Newsletter

October 2, 2017

A "Formula" for Success - 75 Years in Review
There are many approaches to investing in the stock market. Many of these involve an investor analyzing current - and supposedly relevant - information and from that analysis deciding, a) whether or not to invest in the stock market and, b) if so, in which securities specifically to invest. One problem with this common approach is that the stock market often does not react as one might expect to current trends.
The strategies utilized by Alpha Investment Management are unique in that they do not rely on subjective analysis of "current trends". Instead, the Alpha strategies rely on time-tested seasonal trends, which can be observed over many years and/or decades. One of these strategies is referred to as The Formula. The actual Formula strategy utilizes the S&P MidCap 400 Index, the S&P 500 Index, and the Nasdaq 100 Index, as well as intermediate-term treasury bonds. However, in order to provide a longer-term perspective, this piece will use the monthly closing price history of the Dow Jones Industrial Average. Due to its longer history we can use this index to review results over the previous 75 years - from August 1942 through August 2017. The results presented here are for illustrative purposes only and reflect only price fluctuations and not total return.
Figure 1 displays the investment "schedule" for The Formula based on the four-year presidential election cycle.
The Test:
For the purposes of this piece we will compare the following:
  • Strategy #1 will follow The Formula investment schedule and invest in the Dow ONLY during those months in Table 1 that are labeled "BULLISH." During the months labeled "Neutral" Strategy #1 will earn interest at a nominal rate of 1% annually.
  • In order to highlight Dow performance while The Formula is out of the stock market, Strategy #2 will invest in the Dow ONLY during those months in Table 1 that are labeled "Neutral."
The Results:
  • Strategy #1 (holding the Dow during "Bullish" months and earning interest during the "Neutral" months) generated a hypothetical cumulative gain of +41,605% between August 31, 1942 and August 31, 2017.
  • Over the same 75-year time period, Strategy #2 (holding the Dow only during the "Neutral" months) generated a hypothetical cumulative loss of -38%.
Figure 2 displays in blue the growth of $1,000 invested using Strategy #1 and Strategy #2 in red from August 31, 1942 through December 31, 1979.
Figure 3 picks up where Figure 2 ends and displays in blue the growth of $1,000 invested using Strategy #1 and Strategy #2 in red from January 1, 1980 through August 31, 2017.
You can see the stark contrast in performance - and the vast outperformance during the "Bullish" Formula months - in Figures 2 and 3.
It is important from a long-term perspective to note that the "Neutral" months can at times witness significant and persistent stock market gains for a period of years. The market has been experiencing just such a thing in recent years. Historically, however, these favorable periods are ultimately followed by a "reversion to the mean" and a significant market decline, as illustrated in Figure 4.
Figure 4 displays the cumulative results for Strategy #2 and clearly illustrates the fact that the "unfavorable" months can and will register gains from time to time. But ultimately, in each previous case the results returned to form and the Dow suffered a subsequent Neutral period decline.
Finally, let's consider the consistency of favorable returns during the "Bullish" months in The Formula investment schedule versus the "Neutral" months. Figure 5 displays the percentage of time that Strategy #1 and Strategy #2 showed a gain over the preceding 12-month, 5-year and 10-year period.
In sum, Strategy #1 showed a 12-month, 5-year and 10-year gain 76%, 96% and 99% of the time, versus only 47%, 45% and 41% for Strategy #2.
The unfortunate fact is that no investment method works all of the time. Given this reality, the best approach for most investors is to focus on investment methods that offer the prospect for consistency over the long term. The Formula strategy has now demonstrated 75 years of consistent success.
To read more about The Formula strategy, go to the Strategies and Performance page of our website at to read the brochure and view the actual performance results.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.

Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles. The returns illustrated above are not returns of any Alpha strategy and do not include management fees or the cost of funds, trading, or other expenses. To see the impact of these costs, please refer to the net of fees and expenses performance data for specific Alpha strategies. The illustrations above are designed to quantify the effect of certain time periods on representative market indexes. The data used to construct the illustrations were obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.

Alpha Investment Management, Inc. is a SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2017 Alpha Investment Management, Inc.

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