The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (January 7) -- The burning question of the moment for the Foolish Four approach is what to do in our current situation with AT&T and International Paper swapping back and forth the #1 and #2 spots in the Beating the Dow order. If you're familiar with the Foolish Four approach, it automatically skips the cheapest stock among the ten highest-yielding Dow stocks and includes the next four on the list, doubling the weight of the #2 stock. The rationale behind this is that over the past few decades, the cheapest stock has sometimes been a big loser. Bad enough, in fact, that on average it's the single-worst stock for individual performance of the ten high yielders. The #2 stock, on the other hand, has been the star of the production historically. So the Foolish Four method simply plays on those long-term trends without second-guessing. At times, though, it can seem extremely arbitrary to claim that one day, the stock one should double up on is AT&T, and the very next day AT&T is suddenly the stock not even to be included in the group. As little as an eighth per share in the stock price can make that big a difference to the rankings. If you like the Foolish Four approach, though, don't even give such quirks a second thought. If you bought AT&T the day before it ended up in the taboo #1 slot, don't dump it in favor of International Paper because the rankings changed. They could just as easily swap places again next week. Go with the rankings the day you invest, and then forget it for the next twelve months. Now if the quirk just rubs you wrong (as it did me in a similar situation), there is another variation that doesn't automatically dump the #1 stock. In fact, in most years, the #1 stock has been marvelous. It's only occasionally that it's a real howler, but fortunately, those occasions have been relatively easy to see coming simply by looking at that stock's dividend yield. If the cheapest stock on the list is also the highest yielder of the ten, that's almost invariably a signal of a stock in deep stuff. In those years, it's an excellent plan to skip the cheapest stock. In other years, though, it's done just fine. Right now, neither AT&T nor International paper is the highest yielder, so both of them would be included using this variation (which I've dubbed Unemotional Value), regardless of which one currently sits in the #1 slot. For more details on Unemotional Value, visit our Fribbles collection and also the brand new Foolish Workshop, where we track this Dow variation among several others. Above all, don't panic. As MF Cormend pointed out in his terrific Fribble on Friday, all of these Dow variations have trounced the market over the past several decades. You're not going to go too far astray if you limit yourself to those top ten yielders. Stay Foolish! |
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