A Dozens Wrap-Up

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (August 27, 1998) -- Since I'm closing out my tenure with the Motley Fool tomorrow, let me use today's column to review the Dozens models one last time.

The Dozens strategy of maintaining a portfolio can be used either as a device to start a modest portfolio or a long-term plan to manage a full-blown portfolio. The basic techniques would follow the same pattern.

Once you've settled on a strategy (or a mixture of more than one strategy), you buy a single stock each month, always choosing the highest-ranking stock from your strategy that you don't already own in the portfolio. If the top stock is one you already own, drop down until you find one that's not part of your portfolio already.

If you're starting with a small amount of money, you may not have enough to buy a new stock each month (I recommend $1,000 as a minimum position value), but fill in the slots you can afford and pick up the others later as you continue to save.

Then, as each stock becomes a year old in your portfolio, reevaluate it and replace it if necessary. Using this approach, you're always choosing from fairly high in the rankings, every stock is held a year (and a day) so that all of your gains are taxed at long-term capital gains rates, your trading is capped at a maximum of 24 trades a year, and you're able to add new savings every month without extra trading costs. (If you want to own more than 12 stocks, buy two a month.)

I've been following a number of Dozens models in 1998, and it's no secret that the relative-strength-based models have done extremely well (with the exception of the one limited to the 30 Dow stocks). The Value models, however, have been out of favor this year and have lagged considerably. That happens as investment styles move in and out of favor. Don't read it as a sign that a model's bad one-year performance means a poor approach.

The following returns are based on a new $1,000 being added to each portfolio every month. The returns are annualized figures. That is, if the portfolio were to grow at its current pace, the annualized return figure is what it would achieve for the whole year. (Values were calculated at 3:30 this afternoon.)

The benchmark is a portfolio with a monthly deposit into the Standard & Poor's 500 Index Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>. The annualized return for this benchmark is actually a loss of 3.5%. (None of the returns listed here includes dividends.)

Low Price/Sales Dozen -- this value approach takes stocks with a Price/Sales ratio of less than 1.5 from our weekly database. The stocks must have year-over-year earnings growth that's positive. Then the stocks are sorted by relative strength. The annualized return is -22.2%.

Dow Racers Dozen -- this screen chooses the Dow 30 stocks with the highest total return over the previous six months. Annualized return: -14.3%.

Dow Dozen -- this screen uses the Foolish Four rankings. Annualized return: -8.2%.

RS-26 Week Dozen -- this relative strength screen chooses the stocks from the weekly database with the highest total return over the past six months. Annualized Return: +48.7%.

Formula90 Dozen -- another relative strength screen, this one chooses from the database stocks with the highest RS score from Investor's Business Daily, so long as the EPS ranking is at least 90. Annualized Return: +56.6%.

Keystone Dozen -- a large-cap growth strategy using Value Line rankings of 1 or 2 and the highest relative strength stocks. Annualized Return: +64.0%.

RS-IBD Dozen -- the final relative-strength screen, this one takes the stocks in the database with the highest RS scores in Investor's Business Daily. A pure RS test. Annualized Return: a whopping +136.4%.

When you consider that an equivalent investment each month in the S&P 500 would actually have generated a loss so far, the returns for the four relative strength models are astounding. I was fearful that relative strength portfolios would be hit the hardest in market corrections, but at least in recent months, this hasn't been the case. Join me tomorrow for my final Fool column!

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database

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