Is This Hedge Fund Strategy For You?
As you may remember from my articles last week, every year I take a ski trip. My skiing buddies are a group of well connected investment bankers, CEOs, and venture capitalists. Two years ago we were in Vail. Last year it was Telluride.
This year, Aspen.
After four days in the mountains, I was happy to be home. It was late when I walked through the door. Greeting me was a wet slobbery kiss from a two year old Labrador retriever. Moose was very happy to see me, as were his two sisters Sadie and Jasper.
As you probably guessed, I share my house with three Labrador retrievers!
Moose, Sadie, and Jasper are three of the cutest dogs you’ll find on the planet. Now, I know what you’re thinking… why is he talking about dogs? Because it is the perfect lead-in to a popular investment strategy. Have you guessed it yet?
A gold star to all of you who shouted out “Dogs of the Dow.”
I’m sure many of you have heard of this strategy. As a matter of fact, about a year ago I reviewed the strategy. If you took my advice, you’d have saved yourself from major losses. But more on that in a moment. Right now a quick refresher.
Around the beginning of every new year I start to hear about the “Dogs of the Dow” strategy. As a longtime dog owner, the strategy sounds great. As an experienced investor, the strategy leaves much to be desired. The “Dogs of the Dow” gained notoriety from a book published in 1991 called “Beating the Dow.”
The book puts forth a simple strategy of buying the 10 Dow stocks with the highest yields. According to the data at the time, the “Dogs of the Dow” outperformed not only the Dow Jones Industrial Average, but the S&P 500 as well.
Every year the strategy starts cropping up again. Just the other day I had a friend ask me about it (and that’s what prompted this article). Frankly, I’m surprised every time someone asks me about this strategy. There’s major problems with the strategy, but I guess the publisher keeps printing the book.
The problem is simple. The strategy doesn’t work.
In the last 5 and 10 year periods, the strategy actually underperformed the markets. And that’s not good considering the markets themselves have been flat for the last 10 years!
For 2008, the strategy picked a group of companies… Pfizer, Verizon, Altria, AT&T, Citigroup, Merck, General Motors, DuPont, General Electric, and JP Morgan Chase. None of these companies performed in 2008. As a matter of fact, if you’d have put your money in this strategy you’d be sitting on some significant losses.
At the start of 2008:
Citigroup (C) traded for $29.44, today its worth $3.46.
General Motors (GM) traded for $24.89, today its worth $2.92.
DuPont (DD) traded for $44.09, today its worth $23.32.
Do you really need me to go on?
Last year I warned everyone to stay away from the “Dogs of The Dow” strategy. The smart ones listened. The others… well, let’s just say they’re licking their wounds.
What’s my advice for 2009?
It’s more of the same. I suggest you leave the “dogs” to someone else. Resist the urge to select stocks purely on one data point (in this case, yield). It will save you lots of money down the line. So where do I think you should invest these days? That’s an answer for next issue!
Category: Stocks
