The Quadrix Advantage: 15 Years Of Superior Returns

10/26/2015


In early 2000, we unveiled our Quadrix stock-rating system, bringing enhanced discipline to the growth-at-a-good-price approach we've long employed at Dow Theory Forecasts. While we still make mistakes, we think our results over the past 15-plus years speak for themselves. Still, we do get questions about how we generate and calculate our returns, so we answer some of the more common ones in the paragraphs below:

Q How have you done since introducing Quadrix?

A Based on our records, our fully invested Focus List has gained 124.6% since the beginning of 2000 excluding dividends and transaction costs, versus 38.2% for the S&P 500 Index. Our Buy List has done even better, gaining 133.3%. According to the independent Hulbert Financial Digest, our Focus List and Buy List outperformed the S&P 500 Index by more than 2% annually over the 15 years ended June 30.

Q What explains your success?

A By combining the power of Quadrix with individual company analysis, we think we get the best of both worlds. Before any stock is recommended in Dow Theory Forecasts, we look at company fundamentals to determine if Quadrix is painting an accurate picture. If Quadrix makes a mistake consistently, we're likely to see it because we always look over Quadrix's shoulder, making adjustments as necessary.

For example, our P/E versus 60-month historical P/E originally used a simple average to calculate the historical norm. But we found that resulted in a few stocks being rewarded unduly for once having a sky-high P/E. So we changed the historical norm to the 60-month median P/E, reducing the impact of outliers.

That is a small example, but it illustrates the feedback loop essential to our process. We're not astrophysicists or computer programmers, seeing stocks only as equations to solve. We have not back-tested our system to deliver the best historical results. We're stock guys — Chartered Financial Analysts , MBAs, and journalists.

We designed Quadrix to pick stocks the way we pick stocks, rewarding companies with strong operating momentum, good track records, rising earnings estimates, superior share-price action, and attractively valued shares. We look forward while trying to use both sides of our brains, always asking whether the story told by Quadrix makes sense.

Q How about your market-timing record? Has it paid to follow your recommended cash position?

A In addition to calculating returns for our Focus List on a fully invested basis, we calculate returns adjusted for our recommended cash position. We still exclude dividends and transaction costs, but we factor in the return on the bond fund we use for our cash position. On this basis, the Focus List has gained 646.7% (10.1% annualized) since its December 1994 inception, versus 600.7% (9.8% annualized) for the fully invested Focus List and 341.6% (7.4% annualized) for the S&P 500 Index. Since 2000, the cash-adjusted Focus List outperforming the fully invested version by a narrow margin.

While our market-timing advice has not produced dramatically higher annualized returns, it has dampened portfolio volatility. That's one reason we look attractive based on the risk-adjusted numbers calculated by Hulbert Financial Digest. In fact, among all the newsletters monitored since Hulbert began in 1980, Dow Theory Forecasts ranks in the top four for risk-adjusted returns.


Year
Focus List
(Adjusted For
Our Cash
Position)
(%)
Fully Invested
Focus List
(%)
Fully Invested
Buy List
(%)

Fully Invested
Long-Term
Buy List
(%)

S&P 500
Index
(%)
Since 2000 *
152.0
124.6
133.3
154.0
38.2
2015 *
0.1
0.8
0.6
(0.2)
(1.4)
2014
20.2
22.1
20.2
18.7
11.4
2013
33.0
36.0
42.8
42.7
29.6
2012
13.3
14.2
16.0
15.8
13.4
2011
(3.9)
(4.8)
(9.1)
(4.2)
0.0
2010
16.0
19.5
12.7
10.3
12.8
2009
31.8
40.0
37.6
30.6
23.5
2008
(38.6)
(48.8)
(46.3)
(36.5)
(38.5)
2007
21.5
22.8
19.2
10.8
3.5
2006
12.5
12.9
16.9
9.7
13.6
2005
7.6
8.1
13.2
4.1
3.0
2004
16.1
17.5
22.4
9.0
9.0
2003
19.1
20.2
29.2
24.6
26.4
2002
(24.3)
(28.9)
(25.8)
(18.2)
(23.4)
2001
(11.2)
(16.0)
(15.6)
0.3
(13.0)
2000
12.9
14.0
(1.4)
5.0
(10.1)
* Through Oct. 20.

On a fully invested basis, our Focus List has gained 124.6% since January 2000 excluding dividends and transaction costs, versus 38.2% for the S&P 500 Index.

Adjusted for our recommended cash position, our Focus List has gained 152.0% since January 2000. Our cash position has not led to dramatically higher annualized returns, but it has reduced portfolio volatility substantially.


Q How about the individual buy lists? Do their returns reflect above-average risk?

A No. Despite our relatively concentrated portfolios, all three of our buy lists have had lower monthly volatility than the S&P 500 Index, according to Hulbert. As a result, all three lists compare quite favorably to the S&P 500 based on Sharpe ratio, a measure of risk-adjusted returns.

Q When do you announce additions and deletions from your buy lists, and when do those changes get recorded in your performance calculations?

A We make changes on our Wednesday (after the market's close) and Friday (before noon Central time) hotlines.

Changes announced on Wednesday don't take effect until after the market closes on Thursday, using the Thursday close as the price of record. If we make a change in the Friday hotline, the buy or sell occurs at Monday's closing price. Following our advice is easy, and you don't need to buy immediately to earn the returns we report in the newsletter.

Q What's the timeliest, easiest way to follow your rank changes?

A Visit the Subscriber Area of www.DowTheory.com on Wednesday evenings after 5 p.m. Central time and on Fridays around noon Central time. You can also get our rank changes by calling our toll-free telephone hotline at (800) 931-2295. You will need a passcode, found on page 6 of the weekly newsletter.


Annualized Total Returns
For Periods Ended
----- June 30, 2015 -----
Risk (Monthly
Volatility
As % Of
Wilshire
5000 Index)
Risk-Adjusted Return
(Sharpe Ratio)
For Periods Ended
------ June 30, 2015 ------
10 Years
(%)
15 Years
(%)
10 Years
15 Years
Our Focus List
10.0
6.6
93
0.19
0.12
Our Buy List
10.0
6.5
84
0.19
0.12
Our Long-Term Buy List
9.3
NA
78
0.20
NA
S&P 500 Index
7.9
4.4
98
0.15
0.07
Source: The Hulbert Financial Digest, July 2015.     NA Not available.

Dow Theory Forecasts introduced our Quadrix stock-rating system in 2000, more than 15 years ago. According to the independent Hulbert Financial Digest, the Forecasts' Focus List delivered an annualized total return of 6.6% for the 15 years ended June 30, versus 4.4% for the S&P 500 Index.

Better still, our buy lists have outperformed without incurring above-average risk. In fact, despite holding a relatively limited number of stocks, all three of our buy lists have had lower monthly volatility than the S&P 500 Index, according to Hulbert. As a result, all three of our buy lists compare very favorably to the S&P 500 Index based on Sharpe ratio, a measure of risk-adjusted returns.


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