Your basic premise of dollar cost averaging and not jumping in & out has been well established by Bogle, Peter Lynch, etc. This is a safe approach for the average person to match the market's returns.
There is no way to "prove" whether Klondike's success in his 2008 sell & 2009 buy was luck, skill, or a combination of both. No double-blind placebo studies.
My main point: Your assumption that his 2008/2009 experience was "at best a wash" is absurd in this case.
Back of the envelope calculation, using your numbers:
1. You talk about dividends, yet ignore interest on cash. Historically, interest on cash pays more than average market dividends. My savings account was paying 5.1% interest in 2008. By the time he bought back in in June 2009 it was probably closer to 3%. Much more than dividends on stocks, but for easy figuring I'll say interest = dividends. Wash. (see #6 for why this doesn't even make much difference in his case).
2. For easy figuring, let's say a person has 15 years of accumulated contributions in their investment account.
3. Let's use a $1,000,000 account when Klondike sold, in June 2008. If he sold at "high 12,000s" (say 12,600) and bought back at Dow 9000, then his $1,000,000 was still 1,000,000 in May 2009 (it also earned interest. 3% would be $30,000 but ignore interest for the moment) The "buy & hold"'s original $1,000,000 is now 28.6% lower, or $714,285.
4. New contributions. The account is 15 years old. That is 15 years of contributions. So, with zero growth, the year (actually 11 months) of contributions from June 2008 - May 2009 represented 1/15 of the account, or 6.67%, or $66,667 in this case. The 6.67% needs to be adjusted for 2 factors:
a) adjust down since the 15 years of contributions has been growing during those 15 years. So its $1 million value is probably more like 20-30 years worth of contributions; and...
b) adjust up because a person's annual earnings tend to increase over time as they develop in their career. So, earnings in year 16 is likely more than year 15, year 10, etc. For easy figuring, I'll be generous to your argument and assume the effect from a = b, so a wash.
5. Earnings on new contributions. You assume the Dow averaged 9000 during the year (11 months) he was out of the market. Conveniently that is the exact number he bought back in at in June 2009. The Dow was below 9000 from October 2008 until he bought back in in June 2009. It was only under 8000 from Feb 2009 to early April 2009. Probably around 2 months.
You make a big deal about buying at 6500, 6600, 6700, but you also bought at 12,500, 11,700, and 10,300 during that year Klondike was out. The Dow was only below 8000 for a couple of months. 2-3 months of contributions. The account has at least 180 months of contributions (15 year old account). 2.5/180 = 1.4%. So a dollar cost averager got those great low prices on 1.4% of the account's value.
Let's be amazingly generous to your argument and say that you got the screaming deal of Dow 6500 on 100% of that year's contributions. (You didn't, since you stated it averaged about 9000 during that time.)
1 year of contributions. = $66,667 from step 4. Bought at Dow 6500 and growing to Dow 9000, when Klondike bought back in = 38.5% growth. A $25,641 gain. The $66,667 becomes $92,308.
So, Klondike's 1,000,000 = 1,000,000 + 66,667 (new contributions going to cash) = 1,066,667
Buy & Hold: $1,000,000 dropped to $714,285 + $92,308 (contributions + earnings on contributions) = $806,593.
That is $260,074 more (32.2%) in Klondike's account.
6. Even if I am CRAZY generous to your argument, and ignore the interest on cash typcially outpacing dividends, there is no comparison.
Let's be generous and say Klondike earned 0% in interest.
Let's be generous and give you 3% dividends for the entire year. Let's be even more generous and give you 3% dividends on the $1,000,000 account, even though the value was much lower during that year (averaging in the $700,000s and as low as sub-$500,000). 3% on $1,030,000 = $30,900.
So, Klondike's account ends at $1,066,667
Buy & Hold ends at $837,493 ($806,593 + $30,900 dividends).
$229,174 difference. Klondike's account is 27.4% larger. Far, far, far from "at best a wash".
Extra credit: Now, you might even claim that you make EXTRA contributions when the DOW was "crazy low". But, that is not following a Buy & Hold system, which is what you argue for.
How is making extra purchases when the market is crazy low different from Klondike selling some when he thinks it is crazy high? How do you know what is "crazy low"? Did you buy any "extra" at Dow 11,000? That was 21% down. How about Dow 10,000? That was nearly 30% down. Dow 9,000 was 36% down. Or did you magically "sense" to wait through all those great opportunities with your "extra" money and hold out for Dow 6500, 6600, and 6700? If so, how did you know to wait that long? How can you possess such skill, and then claim that it's impossible for Klondike to sense when the market is high?
Both your "extra" buys, and Klondike's sells are either lucky, skillful, or a combination of both. But make no mistake, they are in the same bucket. Neither of those actions are following a buy & hold system.
Extra, extra credit: For you to move the needle on a 15-year old account with your "extra" purchases, you must have kept a significant cash allocation on hand just for such purposes. That cash allocation should be accounted for when you claim your 11% or whatever historical returns.