<THE FOOLISH FOUR>

Why It Works
by Robert Sheard

LEXINGTON, KY. (August 26, 1998) -- A lot of the discussions surrounding the Dow approach focus on techniques and portfolio management ideas. But I'd like to step back today and talk about why the approach works in the first place.

To begin with, the Dow 30 gives us a universe including some of the best, the largest, and the most financially secure companies in the world. While perhaps not 100% bulletproof, these companies at least wear DuPont's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> best Kevlar bulletproof vests. The companies are almost unsinkable when they run into trouble, and that stability and survival power is what makes viable the process of buying them when they're hurting.

So, we're dealing with stocks that are resilient, even in bad times. But it's the bad times that give the Dow investor an edge over the rest of the market. By investing in the stocks with the highest relative dividend yields, one is typically getting the stocks the most out of favor with Wall Street. They're stocks that look ugly to virtually everyone, and because demand for them is low, so are the prices.

Put those two factors together (resiliency and a bargain price), and you have a recipe for market-beating returns. You buy these stocks using a forced discipline when no one really wants them, and then you wait patiently for them to correct their problems and for Wall Street to get interested again. When the turnaround begins, momentum can build, and these "Dow Dogs" can perk up for many months -- witness Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> this year.

About the time everyone who wants the stock has finally bought it, the Dow investor has a new batch of out-of-favor Dogs into which to rotate those funds. In other words, by definition this approach helps you to "buy low," when supply is greatest and demand is lowest, and "sell high," when the stock's no longer a bargain and Wall Street has bid up its value.

It's a classic contrarian strategy that allows the patient investor to stick to a very conservative group of stocks and yet get very impressive returns without much research time and very little trading activity. It's not the only way to invest well, naturally. But it's an amazingly simple one with a record of market-beating returns as old as the 30-stock version of the Dow itself.

Current Dow Order | 1998 Dow Returns

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

08/26/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -1  9/16  44.31 
 IP   -1 15/16  41.00 
 MO   +   3/16  44.19 
 EK   +   7/8   86.38 
  
 
 
                    Day   Month    Year 
         FOOL-4   -1.39%  -2.64%  10.98% 
         DJIA     -0.92%  -4.05%   7.78% 
         S&P 500  -0.79%  -3.26%  11.72% 
         NASDAQ   -1.66%  -5.57%  12.59% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     86.38    42.62% 
  12/31/97  291 Union Carb    42.94     44.31     3.20% 
  12/31/97  276 Philip Mor    45.25     44.19    -2.35% 
  12/31/97  289 Int'l Pape    43.13     41.00    -4.93% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17793.25  $5317.38 
  12/31/97  291 Union Carb 12494.81  12894.94   $400.13 
  12/31/97  276 Philip Mor 12489.00  12195.75  -$293.25 
  12/31/97  289 Int'l Pape 12463.13  11849.00  -$614.13 
  
  
                              CASH    $754.73 
                             TOTAL  $55487.67