The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (February 4) -- With the slow start for the Foolish Four model this year, chiefly thanks to an abrupt drop in AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, several readers have asked what they should make of the fact that while the model's historical return (since January 1, 1996) is ahead of the S&P 500 Index, it lags both the DJIA and Nasdaq indices. To be blunt, not much. First of all, the model we've been tracking on a daily basis, accounting for trading costs and dividends as we go, only has a 13-month track record. Given the much longer history we've recorded, dating back to 1961, in a spreadsheet available through FoolMart, this relatively brief trial is meaningless if you're trying to draw a long-term conclusion. From 1961-1995, the Foolish Four lost to the Dow 30 (an equally-weighted basket of all 30 stocks, including their dividends) in 13 of the 35 years. While 37% losing years sounds poor, you need to take into account that not only did the model beat the market the other 63% of the time, but it often did so by such a wide margin that the losing years were made up for handsomely. One of the dangers of the information age, and our immediate access to so much research and so many databases is that it's easy to lose sight of the bigger picture. We see a statistic and we jump all over it, even when the data for a much larger testing period suggest a diametrically opposed conclusion. Keep in mind that the whole Dow Approach is built on the laws of averages, where something doesn't work perfectly every time, but often enough to make a substantial difference over the long run (twenty or thirty years). Just this morning, MF Cormend's new fribble, Beaning the Dow, discussed a similar look at average performance and how with the odds stacked in one's favor over a long period, success over the long haul is a great "bet." On a quick news note, GENERAL MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> traded ex-dividend today, paying out its newly declared 50-cent dividend. The amount has been added to our model portfolio's cash line in today's portfolio numbers. |
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