Dear Mr. Berko:
What do you think of the Dogs of the Dow strategy to beat the market? Our investment club treasurer, who is a CPA, wants to use a money manager to invest $100,000 in this strategy who will charge us 1.5 percent. Both our treasurer and the money manager tell us this is an easy way to consistently beat the market. Please give us your opinion. And could you please support your answer with facts that we can verify? We need your answer as soon as possible.
E.T., Erie, Pa.
Dear E.T.:
The Dogs of the Dow strategy will no sooner beat the stock market than the Hounds of the Baskervilles. And if you employ a money manager to adjust your portfolio annually (as required by this strategy) the 1.5 percent management fee plus commission costs would dump your portfolio in the tank for the past 10 years.
This cockamamie investment style was popularized by Michael O’Higgins in his book “Beating the Dow” that made the best-seller list in l992. The concept is simple as Simon, which is why it attracts so many idiots. But really it’s not worth a plugged penny in Pennsylvania.
And your investment club treasurer, even though he’s a CPA, is out of his depth in a parking lot puddle. In my opinion, The Dogs strategy is as worthless as horns on a turtle. But I’ll tell you how it works and then how it hasn’t worked for the past 10 years.
The theory is based on the purchase of the 10 highest-yielding stocks in the 30 Dow Jones Industrials. The term “Dogs” is based upon the supposition that these issues have fallen out of favor on Wall Street.
Accordingly, the highest-yielding issues are those that are undervalued by their peers (dogs) and therefore have the highest probability of recovery.
So if you have $100,000 to invest, you will invest $10,000 in each of the 10 stocks. And at the end of the year, you must select a new high-yielding portfolio using the closing price on the last day of trading for the previous year. Some of the stocks might remain, while some companies may be replaced by newer and higher-yielding DOGS. But it doesn’t work, and here is proof:
The following is the closing performance between 2000 and 2009 for the 10 Dogs of the Dow. In 2000, the Dogs were plus 6.4 percent. In 2001, minus 4.9 percent; in 2002, minus 8.9 percent; in 2003, plus 28.7 percent; in 2004, plus 4.4 percent; in 2005, minus 5.15 percent; in 2006, plus 30.3 percent; in 2007, minus 1.4 percent; in 2008, minus 41.6 percent and in 2009, plus 12.9 percent. In this 10-year time frame, the Dogs had five up years of 82.7 percent and five down years of 61.9 percent. So during those 10 years, the Dogs would have gained 20.8 percent or a 2.08 percent annual return. Most money market accounts would have outperformed the Dogs.
The following are the closing performances between 2000 and 2009 for the 30 stocks in the Dow Jones Industrial Average. In 2000, the Dow was minus 4.7 percent. In 2001, minus 5.4 percent; in 2002, minus 15.0 percent; in 2003, plus 28.3 percent; in 2004, plus 5.3 percent; in 2005, plus 1.7 percent; in 2006, plus 19.1 percent; in 2007, plus 6.4 percent; in 2008, minus 33.5 percent and in 2009, plus 28.8 percent.
In that 10-year time frame, the Dow had six up years for a 79.6 percent gain and four down years totaling 58.6 percent. During those 10 years, the Dow had a gain of 21.0 percent or a 2.1 percent annual return – a tad better than the Dogs.
And if you paid an adviser 1.5 percent fee plus commission, you would have bupkes for your efforts. And if your CPA thinks otherwise, then he’s a gross ignoramus, which is l44 times worst than an ordinary ignoramus. There are no formulas that consistently beat the market. But there are a lot of con artists who will tell you they can.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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