Wednesday, April 17, 1996

Every once in a while I get too close to the Dow Approaches and need to step back. Is Beating the Dow really that terrific an approach? Am I just blowing smoke every day in the Dow area about being patient and beating the market again and again?

Fortunately, renewed faith is easy to come by, thanks to Morningstar online. Every few months I travel to the Mutual Fund database and pull up the top 25 overall funds in the Morningstar rankings and compare their performance to Beating the Dow.

Of course, five years is the longest period Morningstar covers in these rankings, but it's good enough for the quick shot of adrenaline I need sometimes. Over the last five years, the 4-stock Beating the Dow approach has compounded at an annual rate of 33.46% -- no doubt a terrific five-year period to be in stocks. Care to hazard a guess as to how many mutual funds beat that return over the last five years?

Exactly ONE!

That's right, out of the thousands of mutual funds in the Morningstar database, only one fund can boast of a return higher than the BTD4, and it beats the BTD portfolio by a whopping three-tenths of a percentage point. The Fidelity Select Home Finance fund averaged 33.78% over the past five years. The next best fund was the Hancock Regional Bank B fund, averaging 30.18%.

Given the fifteen to thirty minutes a year required to use the Beating the Dow approach, this out-performance is nothing short of remarkable. When people ask whether the strategy's getting too popular to work any more, I just marvel at its recent "struggles." No wonder brokerage houses are racing to add Unit Investment Trusts to follow the strategy (and charging investors close to 3% in fees to participate); the results embarrass their high-paid managers. Long live the Foolishly independent spirit of doing it yourself!

[Author's note: the five-year results from Morningstar include the first quarter of 1996, when most funds on the top list were up 5%-8%. The BTD results are through the end of 1995. To worry about that difference, however, is to miss the obvious.]

Transmitted: 4/17/96 11:56