The Motley Fool: The Foolish Workshop

The "Dirty" Dozens

Peoria, IL. (Sept. 23, 1998)-- Last Thursday I talked about "Good" Dozens; today, we look at the "Dirty" Dozens. Please see my last report for an explanation of the Dozens approach. The gist of Thursday's report was that half of the dozens portfolios are soundly beating the market this year, and half aren't doing so hot. The Keystone, Formula 90, and Relative Strength Dozens are all whooping the market.

Keystone has pulled even farther ahead in the last few days and is now up more than 25% versus the Standard & Poor's 500 Index, up just 0.35% in the same period. Let me reiterate a correction I made to the report. Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> was the stock for the end of August, not Capital One as I had originally written. Thanks to several folks for pointing that out to me.

Now, on to the ugliness. Dow Dozens added 20 shares of Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> at $49 per share. The Dow Racers added 13 shares of Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> at $78 1/8. Finally, Low Price to Sales (PSR) added 13 shares of McKesson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCK)") else Response.Write("(NYSE: MCK)") end if %> at $75. Happily, those shares are soaring to $93+ today. Despite the solid performance of McKesson, these three paper portfolios aren't exactly tearing it up. Here are the YTD returns:

 
 Dow Dozens      +0.66% 
 Dow Racers      -8.05% 
 Low PSR         -5.10% 
 S&P 500         +0.17%

It's unfair to characterize any method after just 8 months of testing. We really need to backtest these methods and see if there's any longer term correlation, but looking at the underpinnings of these three models, can we draw any interim conclusions about their effectiveness? It seems that Dow Racers is just a momentum screen for the Dow stocks. There isn't much to suggest that playing the momentum of the Dow is a worthwhile thing to do.

Dow Dozens seems like an interesting twist on the Fool Four, but the problem I see is that if the top stock is already in the portfolio, you add the next one down. After 12 months, you own almost half the Dow Industrials. Is it possible to do well owning equal portions of almost half the index? I'm not sure, but it seems to violate the spirit of the Foolish Four.

What I'd love to do is track the Spark5 as a dozens portfolio and see if that works well. I also wouldn't mind seeing what happens if instead of going to the next stock on the list if the top one is taken, perhaps we just add to the position. Too much risk? I'm not sure. For the people participating on the message boards, what do you think of this idea?

Finally, I want to close tonight by saying how happy we are that Jim Stevens will be writing for the Workshop. Jim comes straight from the community, loves the screens and models, understands what's going on, and will be a great partner for you on the boards. Jim will be contributing two columns a week, and I know he's anxious to mix it up with you and hear your ideas.

Louis and I will also each continue to write a column a week. I am particularly interested in the Dozens approach, the Spark5, and Keystone, so I will generally focus on those. I imagine that Louis will continue refining the ideas he's already presented with the margin screens. He may even introduce other backtestable factors. Finally, we're lining up one more writer for each week, and I'm pretty sure you'll enjoy that as well.

Finally, a reminder that next week has October 1 on a Thursday and we won't have fresh Value Line data until Friday. So would you rather we based the rankings for the Dozens on this week's data or the fresh data on October 2?

Let me know!

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

What Happened to Robert Sheard?