Dozens Domination

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (August 18, 1998) -- Imagine you had a new $1,000 each month to add to your portfolio. Where should you put it? The Standard & Poor's 500? Stocks you already own? Something new? The Dozens model was designed to deal with just such a scenario.

For the first year using this approach, you would buy one new stock using your favorite screen (or combination of screens). At the end of the year, you'd hold a dozen positions. After that, you would begin replacing one stock per month (the oldest one) as it becomes a year old. So you always hold twelve stocks, each one for a year and a day, and you get twelve windows per year to add new savings. Simple.

As a comparison, let's say you've opted simply to go with the S&P 500 Index through the Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>. So far this year, you'd have an annualized return of just 7.0%. The first few months were pretty impressive, but the money you added recently has really dragged down the overall return. But that's the benchmark. If you're beating the S&P 500 Index, you're beating the majority of Wall Street managers.

Let's suppose you opted for an aggressive screen like the Formula90 approach. Would you be ahead of that 7.0% rate? Ever so slightly. How about an annualized rate so far this year of 71.5%?!

If you had selected the Keystone model as your screen, you'd be even better off, with an annualized rate of 73.0%. And this is with stodgy large-cap stocks!

And if you got really aggressive and went for the Relative Strength screens? The model based on 26-week Total Returns is up an annualized 84.3%. And, get this, the model based on IBD's rankings is up a massive annualized rate of 184.6%. Remember our benchmark S&P return? 7.0%? (None of these returns accounts for dividends, although the trades are charged an $8 commission.)

As exciting as all this is, however, keep in mind that the portfolios are only partially complete. Each has just eight stocks so far and is less than a year old, so the returns can still swing pretty dramatically with any major move in a single holding. But nevertheless, the outperformance by these four versions -- all Relative Strength plays -- has been extraordinary.

If you're a regular saver, you might consider adopting some form of a Dozens strategy to give you a simple and effective way of putting that new money to work and avoiding lots of small trades.

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[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]