Momentum Investing ... maybe
motivated by e-mail from Daniel M.

So there's this strategy called Reverse Scale which is (sorta) the reverse of the usual strategy and is more like "momentum" investing and ...

>Usual strategy?
You know: Buy when the stock is down and Sell when it's up.

>That's buy low, sell high, right?
Yes, but this Reverse Scale Strategy goes something like this:

  1. Start with some investment, say $A, when the stock price is, say, Po.
  2. Pick some increase, say 30%. Then, whenever the price increases by 30%, buy another $A worth of stock.
  3. Continue repeating step #2 every time the stock increases by 30%.
  4. Note that there are decision points, namely when these prices occur: (1.3)Po, (1.3)2Po, (1.3)3Po, etc. etc.
  5. You Buy $A worth of stock whenever the stock hits such a price.
  6. However, if the stock retreats to a previous decision point, Sell everything.

>That's it?
Well, the strategy suggests that, after selling everything, you start with a different stock, repeating the above steps.

>How do you find that "different" stock? Throw darts?
Not at all. There are criteria for selecting stocks.
However, I'd like to talk about a modified strategy.

We stick with the same stock and Sell if the stock retreats by 30% from the last decision price.
Then, after selling everything, we Buy again when the price rises to the next higher decision point.
Consider weekly closing prices for GE stock, from April, 1996 to April, 2006.
That's a bit over 500 weeks.
We start by buying $500 dollars worth of stock at $10.69 ... in April, 1996.
We pick some increase, say 30% and identify the magic price targets:
10.69*(1.3) = 13.90, 13.90*(1.3) = 18.07, 18.07*(1.3) = 23.49
and 30.53, 39.69, 51.60 etc.
These are shown in red in Figure 1.
We add another $500 whenever we exceed one of these.

Notice, however, that the price dropped below the last magic Buy price of $39.69 at week 249, so we sold everything.

Figure 1
>And when did you buy back in?
Uh ... never. In fact, our portfolio looks like Figure 2.

>So you just throw in the towel.? Can't you ...?
Hold on! We're not finished yet! We'll modify our strategy a wee bit and ...

>And where's the spreadsheet?
Comin' soon ... to a website near you ...

Figure 2
In the meantime, here are a few more pretty pics:

>And where's the spreadsheet?
Okay, I now have one and it looks like this:

Click on picture to download the spreadsheet

>Portfolio? Buy? What's ...?
You can start with a Portofolio which is different than the amount of stock you Buy at each Decision Price. In the picture, they're both $500.

>Increase? Decrease? What's ...?
Just in case you want to Sell after a Decrease that's different than one of the prices at which you Buy.
If you make them the same, like 30%, then you get a single set of Decision Prices.
If they're different, the Buy and Sell decision prices are different.

>Is that useful?
I have no idea, but it's fun, no?
>Yeah, right ... so take a bow.