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The Daily Dow LEXINGTON, KY. (December 17) -- In these trying times of Federal Reserve announcements, market tensions, and the general holiday brouhaha, it might help to look back over a number of years to see what we might expect from a worst-case scenario. With so many new readers and investors starting down the long-term road to the Foolish "Celestial City," like John Bunyan's Christian, it helps to have a few words of advice to keep oneself out of the Slough of Despond and the grips of Mr. Worldly Wiseman (believe it or not, he's an actual character in The Pilgrim's Progress).
Since 1961, my Unemotional Value four-stock model (the one where you double the weight of the first two stocks) has had a grand total of only four losing years. That's right, just four. Let's look at them one-by-one to see how dreadful investing at those times would have been.
In 1966, the model lost 16.04%, a healthy loss in any conservative investor's book. (The overall market was also down more than 15%, so the approach stayed close to the market in a down year.) But the comment you most often hear by those investors who try to time the market is that it takes so long to recover from such a loss. Well, let's look. The very next year, the approach gained 37.61%. So after one year, you would have recovered all of your lost capital and another 15.54% to boot. That's not asking too much patience of us.
Onward. After a 17.45% gain the next year (1968), the approach had two losing years in a row, confirming everyone's suspicions that Woodstock did more harm than just to the music and fashion industries (please, spare me the e-mail). In 1969, the UV4+ lost 8.19%, followed by a 3.94% loss in 1970, a two-year slump costing 12.45%.
But look at the next six years: 24.02%, 32.20%, 31.81%, 6.56%, 75.45%, and 39.25%. By itself 1971, recovered more than the losses suffered in the previous two years, and the succeeding five years compounded at more than 35% a year. To me, that's worth suffering through the very slow and dismal two years ending the 1960s.
After the loss in 1970, then there wasn't another single loss for two decades, not even in the brutal bear market in 1973 and 1974 (gains of 31.81% and 6.56% as I mentioned above) or in the crash of 1987 (a gain of 23.42%).
The recession in 1990, though, produced the worst year for this model in the 36 years of data we now have for it. Losing 18.89%, 1990 no doubt brought out every naysayer ever hoping to take a poke at the simple Dow strategy. And admittedly, a 19% loss hurts, can't hide from that fact. But what happened after the recession? 1991 happened, the single best year for the Dow Approach in the last 36, gaining 90.02%. If you get a compound growth rate for those two years, it's 24%, right above the long-term average for this approach.
What's it all amount to? It's simple really. The approach has worked for decades with relatively low risk. It's had only four losing years in 36, two of them coming back-to-back to end the 1960s and then none for another two decades. And each time the approach lost money, a patient and Foolish investor would have been more than rewarded for her discipline within a year or two.
So, here's your helping hand out of the Slough of Despond and back onto the narrow path. It's very easy to lose track of the path as you're watching the distractions and temptations around you. Just keep history in mind as you travel through trying times and ask yourself, "Do I have a better long-term plan in mind?" If not, your map should be pretty easy to follow. Stay Foolish!
Today's Dow Numbers Stock Change Bid ------------------- DD + 1/4 91.88 CHV + 1/8 63.25 MMM - 3/4 80.25 EK - 3/8 78.63 IMN -2 1/8 29.25
Day Month Year History
FOOL-4 -0.18% -0.36% 26.05% 26.05%
DJIA +0.64% -3.27% 23.28% 23.28%
S&P 500 +0.70% -4.25% 17.88% 17.88%
NASDAQ +0.42% -2.03% 20.36% 20.36%
Rec'd # Security In At Now Change
1/2/96 142 DuPont 69.88 91.88 31.48%
1/2/96 149 3M 63.76 80.25 25.86%
1/2/96 380 Chevron 52.38 63.25 20.76%
1/2/96 148 E. Kodak 67.00 78.63 17.35%
7/16/96 14 Imation 26.16 29.25 11.82%
Rec'd # Security In At Value Change
1/2/96 380 Chevron 19902.50 24035.00 $4132.50
1/2/96 142 DuPont 9922.25 13046.25 $3124.00
1/2/96 149 3M 9500.09 11957.25 $2457.16
1/2/96 148 E. Kodak 9916.00 11636.50 $1720.50
7/16/96 14 Imation 366.21 409.50 $43.29
CASH $1942.85
TOTAL $63027.35
Transmitted: 12/17/96
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