Current Events,  Return on Investment

What do WWII Planes and Investment Strategy have in Common?

What do missing bullet holes in World War II aircraft and investing in today’s market have in common? Let’s begin by explaining the importance of the “missing” bullet holes. When telling stories of war like World War II it is only natural to think of the action, but there were silent thinkers who also contributed. The Statistical Research Group (SRG) was charged with determining how to armor the aircraft to reduce the number of planes shot down by the enemy. With too much armor, the planes were slower and could more easily be shot down, and with too little, the planes could not survive the bullet hits. The SRG began examining the planes returning from battle. They found the pattern of bullet holes in the returning aircraft was as follows:

  • Engine had                           1.11 bullet holes per ft2
  • Fuselage had                        1.73 bullet holes per ft2
  • Fuel System had                  1.55 bullet holes per ft2
  • Rest of the plane had          1.80 bullet holes per ft2

The question was this: where should the additional armor be added? Look at the number of bullet holes above. The generals were not in agreement where armor would be added. What would you have chosen? Which area of the planes?

Logically, would you have said the fuselage or the fuel system? It seems almost logical on first reading. Abraham Wald, a mathematician at SRG, said the question was not where the bullet holes were – it was where they weren’t. The planes that were able to come home to be studied were those that had survived, that had the fewest bullets in the engine. The only logical reason was that bullets hitting the engine area cause more planes to crash than the same number of bullet hits in the other parts of the aircraft.

How does that apply to investing? It seems almost logical that being out of the market in down times should improve returns, right? Jesse Livermore, one of the great traders of the past said this: “Money is made by sitting, not trading”.

The application to investing is this: almost all stock market gains are concentrated to a few days. Missing those days has a significant impact on how well your stock investments do. The first study I saw was done by Peter Lynch and John VanderHeiden at Fidelity. Index Fund Advisors did the study of missing the best days of the 20 years January 1, 1998 to December 31, 2007. Beginning with $100,000 in the S&P 500, this is what missing the best days did. There were 5,036 days in those 20 years.

Beginning with $100,000 the ending amount on December 31, 2007:

5,036 days                $401,350       $301,350 gain                      100% –

Miss best 5 days      $266,250       $166,250 gain                      – 45%

Miss best 10 days    $200,300       $100,300 gain                      – 67%

Miss best 20 days    $125,700       $  25,700 gain                      – 91%

Miss best 40 days    $  56,700       $  -43,300 loss                      -114%.

Think of it – missing just an average of 1 day per year would have reduced your potential gains by 91%![1], [2]

Like the missing bullet holes it is not immediately obvious that missing just 5 days of 20 years would lead to significantly lower returns.

Of the 4 biggest one day gains in the DOW, every one came when the market was down, when timing the market would have meant missing those days. Biggest was December 26, 2018 (1,024). Were you in the market then, or out? That was just a couple months ago.

The second and third largest gains were on October 13th and 28th, both in 2008 (936 and 889). Both of those days were in the bottoming of the Great Recession. The fourth day was January 4, 2019 (747) – yes, this year. Were you out of the market?

Yes, it is true that missing the worst days can increase your gains. That is far more difficult. An investor or manager must guess which day to sell and which day to buy. Half the worst trading days came when the market was rising. Did you miss the worst days?

Both the profit sharing account and growth account are fully invested to ensure the best days are not missed. The profit sharing account uses short positions to cushion the down market times.

Actual returns show the benefit to the investor with the fully invested strategy.

In the words of the late Jack Bogle: “The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years on this business, I do not know of anybody who has done it consistenly.”[3]

[1] “Stock Market Extremes and Portfolio Performance”, H. Nejat Seyhun, University of Michigan

[2] “Trying to Time the Market? Missing Just a Handful of the Best Days Can Tank Your Returns” , Drew Housman (

[3] The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair share of Stock Market Returns, John C bogle.

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