Stock Market Statistical Analysis: Investing Versus Trading Strategies

06 Sep 2022

In 2008, Warren Buffett issued a 10-years challenge against a hedge fund, Protégé Partners LLC, stating that the hedge fund industry’s returns are not able to beat that of the S&P 500 Index in the long term, and he won. Surprisingly, the hedge fund comprehensively analyzed and traded stocks, whereas Warren Buffett simply invested in an S&P 500 Index Fund. Being very fascinated with the results, we want to compare investing with different trading strategies’ returns ourselves to determine which would be more profitable in the long term. Based on Warren Buffet’s results, our initial hypothesis is that investing is more profitable than trading in the long term. To prove this, we created a backtesting simulation (Paper Trading) Python program; comparing multiple trading strategies to a simple buy-and-hold investing strategy, using multiple Indonesian Blue-Chip stocks’ data, which is gathered using Yahoo Finance’s API. Then, we added Linear Regression on each strategies’ cumulative returns to determine their long-term sustainability. Next, we compare the results for each strategy by plotting all of their returns together into a single chart. Finally, we determine which strategy generates the highest annual return, through visual and statistical approaches, and thereby prove our initial hypothesis. Through our analysis, it is concluded that the Investing strategy generates the highest Average Annual Return compared to the other strategies used in this research. This proves our hypothesis to be correct. Additionally, we also determined causes for the prior outcomes through general and mathematical reasonings.