The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (January 29) -- Almost every day, some economic indicator or another will be released that simultaneously excites and depresses traders who react with a time horizon of maybe 45 seconds. But for those of us who are investing for slightly different purposes (like goals still decades away), does the constant barrage of economic numbers matter that much? When the Employment Cost Report suggests inflation is fine, but later in the day we hear Consumer Confidence is rising and Retail Sales are strong, what do you do? Do you buy in the morning and then sell in the afternoon, only to buy back the next day when the Durable Goods orders come in much lower than expected? I hope not. It's reasonable to ask why we even follow these things if they don't alter the way we invest. And the answer is that we follow them for different purposes than you might think. There's a difference between wanting to understand why and how the economy is functioning and taking that information and then acting on it based on your predictions for the short term. Anyone interested in following the stock market is concerned with interest rates and inflation since they can affect the future of stocks, but if one or another indicator ticks up or down, long-term investors need not lead the stampede for the exits or head to their cyber-brokers to buy more. Our Foolish approach is one you can stick with through all markets. Remember the essential point about managing a portfolio of individual stocks: you are not buying the entire stock market. If you're doing your homework and buying the right stocks, you should succeed in all markets. (Success may well mean a smaller loss than the index in a lousy market, but beating the index is success, despite the raw numbers involved.) One example I refer to frequently is the last ugly bear market almost everyone can agree really occurred -- that is, 1973 and 1974. With "the market" getting hammered right and left, the simple 30-minutes-a-year, high-yield, low-price, boring-as-watching-grass-grow Dow Approach recorded a 38% gain. In the last recession in 1990, the approach wasn't so fortunate. One of the worst losses recorded in the last several decades, the approach still only lost 15% to 18%, depending on which variation one used. That's slightly worse than the overall market that year, but for those who were patient and stuck with the plan, 1991 rewarded them plentifully with a whopping 90% advance. Those caught timing the market and jumping out during the lean period in 1990 stood a very good chance of missing the 1991 rally as well. So watch the indicators with great interest, sure, but separate that activity from the desire to manipulate your investment strategy from the top down. We've found it a whole lot easier and more profitable if you stay invested and focus your efforts on your strategies for choosing winners rather than playing market timing games. You can bet the next marketing blitz from Elaine Garzarelli will still be touting her prediction of the 1987 crash, not her recent reversals and dead-wrong predictions. (Sell Everything Now!... no wait! Buy some more!) That's the market-timing game, and it's just too Wise for us. |
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