The Daily Dow
Friday, September 26, 1997
by Jerry Thomas (TMF Cheeze)

SHERMAN OAKS, CA (Sept. 26, 1997) -- Long before I ever heard about The Motley Fool, long before there even was a Motley Fool, there was a book called Beating the Dow, by Michael O'Higgins. I read it in 1992, the year after it was published. I wanted to learn about investing and the approach was intriguing. I swallowed the book whole one day in the summer of '92.

Never mind that I didn't have any money to invest.

I lacked funds, but not paper and ink, so I decided to track a BTD portfolio on a notepad. While sorting through some old papers the other day, I found that notepad, with all my calculations still on it. Here's what the DJIA 10 looked like back then, on September 4, 1992:

IBM 5.6% yield
Union Carbide 5.5%
Texaco 5.0%
Sears 4.8%
General Motors 4.6%
Exxon 4.6%
American Express 4.5%
Eastman Kodak 4.5%
Chevron 4.5%
Westinghouse 4.4%

Glory, would you look at those yields! It was quite a different market in those days. Today, there are only two companies in the entire Dow 30 with a yield at or above 3%. Back then, there were fifteen. Obviously, we were on the very brink of a screaming bull market, yes?

Well, no. The Dow Jones Industrial Average closed at 3281.93 that day, September 4, 1992. A year later, the Dow stood at 3633.93, up about 10.7%, which is more or less smack-dab ho-hum dead-on average annual DJIA growth. The big moves in the Dow, above 4000, above 5000, above 6000, didn't come until later. But how did the various BTD approaches do versus the market average in that period?

The Dow 10, comprised of the above list of 10 high-yielders returned 16.2% for the year, impressively outperforming the market and cementing one more brick in the wall of proof that beaten-down Dow stocks tend to give better returns than the index as a whole.

The five lowest-priced stocks on the list, comprising the Dow-5 Portfolio were, in order: Union Carbide, Westinghouse, American Express, General Motors, and Sears. How did these companies fare a year later?

UK   up 34.5%
WX   down 6.9%
AXP  up 52.3%
GM   up 28.1%
S    up 31.7%

Not a bad average. Had you invested in this basket of stocks on 9-4-92, a year later you'd be up 27.9%, almost tripling the Dow, and that despite the severe underperformance of Westinghouse in that period.

Alas, you'll note, however, that Westinghouse, the poorest performer, was also the second-lowest priced high yielder. That means had the Foolish Four been invented at the time, an investor would have tossed out the strong-performing Union Carbide and doubled up on doggie-dog-dog WX. How much damage would this tinkering have caused?

Answer: The Foolish Four for this 12-month period would have returned 21.3%. That's 6.3% less than the Dow 5, but a solid 5.1% ahead of the Dow 10, and a mere one-tenth of a percent shy of a clean double of the DJIA as a whole. Hey, I'll take it.

So much for nostalgia. Today, the Dow Jones Average is skirting 8,000, and quite a few of the companies in the old list have been swapped for new ones. It's a whole new world.

The only major news for today's Dow stocks comes from Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>, which is behaving quite a bit like a Dow Dog tends to behave: it's laying off workers, cutting costs, and reportedly plans to sell off some nonessential assets. In other words, the company is restructuring in response to the challenges that have contributed to its stock's underperformance. Such capacity for these companies to right themselves when things are going poorly is part of the reason that the Beating the Dow approach works. Today analysts at Bear Stearns upgraded their rating on EK to "attractive" from "neutral," largely in reaction to the restructuring efforts by EK management.

TMF Sheard returns to this space next Monday. Thanks for letting us keep your chair warm, Robert.

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________

Stock  Change   Last
--------------------
T    +   1/2   45.38
GM   +  13/16  65.94
CHV  +   3/8   83.06
MMM  +2  5/8   90.44

           Day   Month    Year
                  Day   Month   Year
        FOOL-4   +1.32%   9.73%  16.22%
        DJIA     +0.95%   3.93%  22.86%
        S&P 500  +0.78%   5.09%  27.60%
        NASDAQ   +0.20%   5.99%  30.30%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     83.06    27.79%
   1/2/97  179 Gen. Motor    55.75     65.94    18.27%
   1/2/97  120 3M            83.00     90.44     8.96%
   1/2/97  479 AT&T          41.75     45.38     8.68%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  153 Chevron     9945.00  12708.56  $2763.56
   1/2/97  179 Gen. Motor  9979.25  11802.81  $1823.56
   1/2/97  479 AT&T       19998.25  21734.63  $1736.38
   1/2/97  120 3M          9960.00  10852.50   $892.50


                             CASH   $1009.44
                            TOTAL  $58107.94