Tuesday, June 18, 1996
Dump the Dow?
The year Fools saved Memorial Day weekend
by MF Buck

(Part Two)

Back to O'Higgins and that near-fateful weekend. He mentioned that the seventh year of each decade tends to be bad. Fools commented about this in the folder using such phrases as "voodoo numerology." Still, nothing could be taken too lightly because the fun of Memorial Day weekend was at risk. So we reviewed Templar's data, which is almost twice as much data as O'Higgins has in his own book. In 1967, 1977 and 1987 the average annual gain for the 30 Dow stocks was 6.72%. The performance of the Foolish Four, Fooldom's own market-beating twist on the BTD system (not hot dogs and sunscreen), had an average gain those years of 12.28%. Hmmm. Nearly doubled the performance of the 30 Dow stocks.

Mr. O'Higgins also made the point that the market is so high-priced right now that in his mind it would have to fall 10% - 15% to get back to its relative value just before the infamous crash of 1987. The Dow fell so much in one day that year that people still refer to it as Black Monday. Since that happened to occur in a year ending with the ominous number, 7, we gave MF Templar's data a more thorough going over. The 30 Dow stocks went up 11.96% that year. The six multi-stock BTD strategies had returns ranging from -0.58% to 13.39%. One single-stock strategy, the #2 BTD stock, had a whopping gain of 54.79%. Keep in mind that the crash occurred in October, leaving very little time in the remaining part of the year for the market to recover. Yet all but one Dow strategy made money! Maybe the weekend could be saved after all!

But O'Higgins and the article just wouldn't go away. He told us that the market returned an average of only 1% per year during the latter years of each decade going back a century, referring to any year ending in a 6, 7, 8 or 9. One percent! Yikes! How could the holiday be saved if the next few years of investing would be so bad?

Once again we clicked on Templar's database to look up various strategies' performance during those years over the last three and a half decades. We found some astoundingly different information, driving home the Foolish point that short-term periods are not as predictable as O'Higgins would have us believe. The 30 Dow stocks gained 9.84% on average and the Foolish Four did slightly better, up an average of 10.08% in each of those years.

However, the great weekend to be had by all was not yet a slam dunk. The really big scare in the Greenberg article, the one that got everybody's attention was O'Higgins' fear that if the market goes down 35% - 45% most people won't tolerate it. He believes most investors won't stick to the strategy long enough to allow the market to recover. Maybe, but Fools will. We discovered that, in the last 35 years, the largest single loss of the 30 Dow stocks occurred in 1974 when they went down 16.91%. We also learned that the following two years they went up 44.24% and 31.28% respectively. The Foolish Four did even better, going up 2.67%, 82.20% and 53.23% in those same three years. With just two years to recover from the single worst year of the last 35, both the group of 30 Dow stocks and the Foolish Four gave investors well-above-average returns. Heck, Fools would love to have that happen again in the next three years!

One last eye-popping statistic we discovered. From 1961 through 1995, the 30 Dow stocks had two successive losing years only once. The total loss in 1973 and 1974 was 25.94%. Ouch! What did the Foolish Four do during that two-year period? The approach GAINED 38.86%.

What did we get from all of this? To be fair, MF Templar's database of 35 years is very revealing, but O'Higgins is using stock market data going back 100 years. As grateful as we are to Templar for his work that nearly doubles the amount of data in the O'Higgins book, it's too bad we don't also have BTD data going back a century. If we did, we could really compare apples to apples when reading Greenberg or anybody else who is out to ruin an otherwise perfectly Foolish weekend.

Even though we don't have a century of BTD data, Fools know O'Higgins is right when he says in his book that there is no certain way to predict the short-term movements of the market. We wonder why he of all people tries. We don't try to predict that years 1996 through 1999 will be good, bad or average. As much as we applaud O'Higgins for giving individual investors his market-beating system, we also completely disagree with his penchant for trying to time the market. The great irony is that his system eliminates any need for timing.

In the final analysis that saved the Memorial Day weekend of 1996, Fools decided to let O'Higgins himself comment about how to use the Beating the Dow system to replicate past gains. We opened his book to page 191 and found some fittingly memorable words. "The key to these remarkable returns is discipline -- putting the 30 Dow stocks to the same test year in and year out, selling stocks when they fail to measure up, buying those that do. Come hell or high water."

Discipline. Come hell or high water. All over Fooldom those words rang out in jubilation and celebration. "Heed thine own words, Mr. O'Higgins," we reminded him. "Fools couldn't agree with you more!"

That's how Fools saved the great Memorial Day weekend of 1996.

Transmitted: 6/18/96