<FOOLISH FOUR PORTFOLIO>
Trouncing the Dow
A Foolish book report
by Bob Price
([email protected])
Houston, TX (December 8, 1998) -- All of the Dow Investing systems we've covered in this area all have had something in common. They look only at two factors: share price and dividends.
That's a good thing, in that it keeps things simple, but there would seem to be a limit to what you can do with only these two variables. In fact, there have been posts in the Dow board on the web in the last few months suggesting that we may have done the best we can with these factors. Yet a tantalizing number of very well-performing Dow stocks remain outside the system.
What if we consider other variables? It seems like you might be able to find a better Dow system if you looked at more information about the companies. The recent book Trouncing the Dow, by Kenneth Lee, uses traditional fundamental valuation ratios book value and return on equity to select winning Dow stocks.
The book covers a number of other areas: Warren Buffet's investment style, history of the stock market, the miserable underperformance of mutual funds -- all Foolish topics. The part of the book that is most interesting to me is the system itself, though, which Ken calls "Benchmark Investing."
Ken has been using this system (and refining it) since 1991. He originally applied it to all stocks listed by Value Line but found it worked just as well when applied to Dow stocks only -- and was much simpler.
Benchmark Investing uses the performance of the Dow stocks over the last 10 years as the benchmark, or reference point, for their expected performance in the future. It gives you target high and low prices. As you would guess, you want to buy Dow stocks that are below their target prices and sell stocks that are above their target prices. This means you may hold different numbers of Dow stocks in different years. The number selected has varied from only one stock in some years to over half the stocks in the Dow in other years. On the other hand, the system tends to generate longer holding periods than one year, so this doesn't mean that you would actually hold only one stock in the years with few picks.
The rules require historical prices, book values, and returns on equity, which Ken gets from The Value Line Investment Survey. Ken's book includes excellent documentation of how his strategies have worked with stock picks and returns for each backtested year.
I found the book an excellent, quick read, and it's well worth investigating for someone who wants higher returns than the dividend/price based strategies can provide. You have to be willing to do a bit of work to get the returns, though.
I'll run the numbers on the Benchmark Investing backtest from 1973-1996 (based on the stock selections in the book). Next time, I'll report on the outcome and how Benchmark Investing compares to the other Dow approaches we've researched over the same time period.
Questions?
If you have questions about this approach, Ken Lee has been participating in the Dow board on the web and has been answering questions there. His name on the boards is dowbuys. Of course, he would probably appreciate if you read his book first!
Fool on!
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Current Dow Order | 1998 Dow Returns
12/08/98 Close
Stock Change Last -------------------- UK -2 42.00 IP - 7/8 42.81 MO - 5/8 54.50 EK - 13/16 73.19 |
Day Month Year
FOOL-4 -2.06% -2.22% 11.61%
DJIA -0.47% -0.97% 14.16%
S&P 500 -0.53% 1.53% 21.74%
NASDAQ -0.29% 4.37% 29.57%
Rec'd # Security In At Now Change
12/31/97 206 Eastman Ko 60.56 73.19 20.85%
12/31/97 276 Philip Mor 45.25 54.50 20.44%
12/31/97 289 Int'l Pape 43.13 42.81 -0.72%
12/31/97 291 Union Carb 42.94 42.00 -2.18%
Rec'd # Security In At Value Change
12/31/97 206 Eastman Ko 12475.88 15076.63 $2600.75
12/31/97 276 Philip Mor 12489.00 15042.00 $2553.00
12/31/97 289 Int'l Pape 12463.13 12372.81 -$90.31
12/31/97 291 Union Carb 12494.81 12222.00 -$272.81
Dividends Paid YTD $1092.81
TOTAL $55806.25
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