‘Beating The Dow’ Was Hard In ‘95 Rally
Everybody wants a money machine, an automatic investing strategy that doesn’t take any work or worry. No more poring over prospectuses. No listening to sales pitches from your broker. Just sit back and watch the profits flow.
Thus, the rapid growth of index mutual funds, which forgo active stock picking and try to mimic major stock indexes, such as the S&P 500.
But what if you still want to invest in individual stocks? How do you do it without committing vast blocks of time to research and sleepless nights?
Five years ago, money manager Michael O’Higgins and financial writer John Downes teamed up to write a book called “Beating the Dow,” a no-brainer strategy for investing in underpriced stocks among the 30 issues that make up the Dow Jones industrial average.
In the 23 years since 1973, when O’Higgins began developing the strategy, it has outperformed the Dow 18 times. Over that period, the 30 Dow stocks as a group have brought investors total returns of 1,229 percent, including reinvested dividends, the authors say. Meanwhile, the 10-stock Beating-the-Dow strategy has returned 4,172 percent, and a five-stock strategy, 7,746 percent. A strategy of investing in just one underpriced Dow stock a year has returned 18,157 percent.
The Beating-the-Dow strategies brought investors fine returns again last year, although they stood out less against the brilliant backdrop of the markets overall. While the Dow returned a stunning 36.4 percent, the best since the 44.4 percent of 1975, the 10 Beating-the-Dow stocks returned 36.7 percent, the “Flying Five” did 30.5 percent, and the single stock, Chevron, 21.7 percent.
The Beating-the-Dow approach was undermined by the terrible performance of the one loser on the list, Woolworth Corp., which was down 12.3 percent. Without Woolworth, the remaining nine stocks would have returned more than 40 percent.
The 10-stock strategy calls for investing equal sums in the 10 Dow stocks with the highest dividend yields - the stocks in which the dividends represent the highest percentage of the stocks’ price at the time the investment is made.
The theory is that yields are high because the prices of these 10 stocks are artificially low. The investor, thus, hopes to enjoy both the high dividend payment and an increase in stock price, the two components of total return.
The strategy assumes that all 30 Dow stocks represent big, solid companies that are likely to recover from any downturns and do well in the long run.
For example, the top performer on the 1995 list was Sears, Roebuck, which returned 71.5 percent, largely because it spun off its Allstate unit and used a new marketing strategy to outperform other retailers in what was otherwise a lousy Christmas season.
The Flying Five strategy picks the five lowest-priced among the 10 Beating-the-Dow stocks, relying on statistical evidence that lower-priced stocks outperform high-priced ones. Troubled Woolworth’s had an especially damaging effect on the Flying Five last year, since it made up 20 percent of the portfolio.
The single-stock Penultimate Profit Prospect picks the second-lowest priced among the 10, considered a bargain. (Experience has shown the lowest-priced to be a company in serious financial difficulty.)
All three strategies call for reinvesting dividends and holding the investments for 12 months, then updating the list based on the latest performance.
You can invest in the Beating-the-Dow stocks at any time, not just the start of the year. You’ll probably have to commit about $10,000 to keep commissions from chewing you up.
xxxx ‘Beating the Dow’ picks for 1996 Chevron is the Penultimate Profit Prespect.
Stock Yield 1995 Close Jan. return Intl. Paper 2.6 $37.88 +7.6% Chevron 3.8 52.38 -1.0 E. Kodak 2.4 67.00 +9.5 3M 2.8 66.38 -2.8 DuPont 3.0 69.88 +9.8 “Flying Five” +4.6 GE 2.6 $72.00 +6.6 Texaco 4.1 78.50 +3.0 J.P.Morgan 4.0 80.25 +1.2 Exxon 3.7 81.13 -0.3 Philip Morris 4.4 90.25 +2.7 All 10 stocks +3.6
Dow Jones Ind. Avg. +5.5