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Everyone is familiar with the KISS acronym, which – as everyone knows, stands for “Keep It Simple Stupid”.  Far fewer people are familiar the CISS acronym, which stands for “Clearly Insanely Stupidly Simple”.  Which is what the “system” that follows qualifies as.  The good news is that beyond being simple it has also been pretty darned effective over time.

The Large-Cap/Small-Cap Debate

If you search the web for info on large-cap stocks versus small-cap stocks you will come up with roughly 537 million possible results.  It is quite likely that somewhere in there you will find a more effective method than that which follows.  Still, that’s a lot of links to search through.  So may try this out first.

Jay’s CISS Large-Cap/Small-Cap “System”

Here are the rules:

*If the S&P 500 Index outperforms the Russell 2000 Index for the year, then buy and hold the S&P 500 Index during the following year.

*If the Russell 2000 Index outperforms the S&P 500 Index Index for the year, then buy and hold the Russell 2000 Index during the following year.

Did I mention it was simple?

The Results

To measure results I am using monthly total return data for the S&P 500 Index and the Russell 2000 Index.  We will look at performance for

*The System (as described above)

*The Opposite of the System (i.e., holding the worse performer from the pervious year)

*Splitting capital between S&P 500 and Russell 200 and rebalancing Jan.1 each year

Figure 1 displays the growth of $1,000 for each of the above starting on 12/31/1979.

Figure 1 – Jay’s System versus Buy-and-Hold and the “Opposite” of the System; 12/31/1979-10/31/2018

For the record:

*The “System” gained +10,361%

*Splitting money between SPX and RUT on Jan 1 each year gained +6,272%

*Doing the “opposite” of the System gained +3,471%

Because this “System” is always fully invested in either the S&P 500 Index or the Russell 2000 Index, it takes its lumps in bear markets.  So in 2008, for instance, it took a beating just like everything else.  But that is the nature of “always fully invested in stocks” methods.

The key point is that in the end the CISS System made 1.65 times as much as “buy-and-hold” and 2.98 times as much as doing the “opposite of the System”.

Figure 2 displays the Year-by-Year results:

Column A = Year

Column B = SPX total annual return

Column C = RUT total annual return

Column D = Which index is held during that calendar year

Column E = Annual % gain(loss) for The System for that calendar year

Column F = Annual % gain(loss) from holding the “other” index

Column G = % gain(loss) from splitting $ evenly between SPX and RUT on January 1^st

Column H = $1,000 using System becomes

Column I = $1,000 using the “Opposite” of the System becomes

Column J = $1,000 using Buy-and-Hold (and annual rebalance) becomes

A	B	C	D	E	F	G	H	I	J
Year	SPX	RUT	Hold	System	Opposite	Split	System	Opposite	Split
1979	18.6	43.1					$1000	$1000	$1000
1980	32.5	38.6	RUT	38.6	32.5	35.5	1,386	1,325	1,355
1981	(4.9)	2.0	RUT	2.0	(4.9)	(1.4)	1,414	1,260	1,336
1982	21.5	24.9	RUT	24.9	21.5	23.2	1,767	1,531	1,646
1983	22.6	29.1	RUT	29.1	22.6	25.8	2,282	1,877	2,072
1984	6.3	(7.3)	RUT	(7.3)	6.3	(0.5)	2,115	1,994	2,061
1985	31.7	31.0	SPX	31.7	31.0	31.4	2,786	2,613	2,708
1986	18.7	5.7	SPX	18.7	5.7	12.2	3,306	2,762	3,038
1987	5.3	(8.8)	SPX	5.3	(8.8)	(1.8)	3,480	2,519	2,984
1988	16.6	25.0	SPX	16.6	25.0	20.8	4,058	3,149	3,605
1989	31.7	16.3	RUT	16.3	31.7	24.0	4,717	4,147	4,469
1990	(3.1)	(19.5)	SPX	(3.1)	(19.5)	(11.3)	4,571	3,339	3,965
1991	30.5	46.0	SPX	30.5	46.0	38.3	5,964	4,877	5,481
1992	7.6	18.4	RUT	18.4	7.6	13.0	7,062	5,248	6,195
1993	10.1	18.9	RUT	18.9	10.1	14.5	8,395	5,777	7,092
1994	1.3	(1.8)	RUT	(1.8)	1.3	(0.3)	8,242	5,853	7,074
1995	37.6	28.5	SPX	37.6	28.5	33.0	11,339	7,519	9,409
1996	23.0	16.5	SPX	23.0	16.5	19.7	13,942	8,759	11,265
1997	33.4	22.4	SPX	33.4	22.4	27.9	18,594	10,717	14,404
1998	28.6	(2.5)	SPX	28.6	(2.5)	13.0	23,907	10,445	16,279
1999	21.0	21.3	SPX	21.0	21.3	21.2	28,938	12,665	19,722
2000	(9.1)	(3.0)	RUT	(3.0)	(9.1)	(6.1)	28,064	11,512	18,526
2001	(11.9)	2.5	RUT	2.5	(11.9)	(4.7)	28,762	10,143	17,656
2002	(22.1)	(20.5)	RUT	(20.5)	(22.1)	(21.3)	22,870	7,902	13,897
2003	28.7	47.3	RUT	47.3	28.7	38.0	33,677	10,168	19,173
2004	10.9	18.3	RUT	18.3	10.9	14.6	39,850	11,275	21,973
2005	4.9	4.6	RUT	4.6	4.9	4.7	41,665	11,829	23,013
2006	15.8	18.4	SPX	15.8	18.4	17.1	48,246	14,001	26,944
2007	5.5	(1.6)	RUT	(1.6)	5.5	2.0	47,490	14,770	27,473
2008	(37.0)	(33.8)	SPX	(37.0)	(33.8)	(35.4)	29,920	9,780	17,750
2009	26.5	27.2	RUT	27.2	26.5	26.8	38,050	12,368	22,510
2010	15.1	26.9	RUT	26.9	15.1	21.0	48,268	14,231	27,228
2011	2.1	(4.2)	RUT	(4.2)	2.1	(1.0)	46,252	14,531	26,947
2012	16.0	16.3	SPX	16.0	16.3	16.2	53,654	16,907	31,306
2013	32.4	38.8	RUT	38.8	32.4	35.6	74,484	22,383	42,452
2014	13.7	4.9	RUT	4.9	13.7	9.3	78,130	25,447	46,397
2015	1.4	(4.4)	SPX	1.4	(4.4)	(1.5)	79,211	24,324	45,694
2016	12.0	21.3	SPX	12.0	21.3	16.6	88,684	29,507	53,294
2017	21.8	14.6	RUT	14.6	21.8	18.2	101,674	35,949	63,015
2018	2.9	(0.7)	SPX	2.9	(0.7)	2.9	104,613	35,712	64,836

Figure 2 – Year-by-Year Results

Summary

So is this a great, world-beater “System.”  Probably not.  But it has managed to outperform buy-and-hold by a factor of 1.65-to-1 over the last 38 years.

And did I mention that it’s simple?

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe 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.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.