Dogs of the Dow

[GrayHare]

Around each New Year the "Dogs of the Dow" approach gets press coverage. I've wondered if, historically speaking, a different month might actually be a better time to update one's "Dogs" holdings. Has anyone seen stats to support either Dec/Jan or some other month?

[NW-Bound]

I first heard of this strategy perhaps 12-13 years ago. The premise of this sounded quite reasonable, and I made a mental note to study it a bit more. Then, I promptly forgot about it.

About 5 or maybe 7 years ago, I ran across a book on this, authored by the Motley Fool, at a used bookstore for a couple of dollars. So, I bought and read it. There were a few different variations to this, as they tweaked it to see what worked out the best using historical data.

Since the book was not current even then, I wondered how the method had been working. So I surfed the Web, and found out that the Motley Fool conceded that it did not work as well as when they first backtested the strategy for the book publication, and they did not recommend it anymore.

Just now searched the Web again, and saw several mentions of it. I guess since the Dow beat the S&P in 2011, there will be a revival of this now.

[steelyman]

This reminds me of The Beardstown Ladies - a book I actually bought!

[Nords]

Oh, good. More fuel on the dividend fire.

Maybe I should start selling puts on my DVY shares. The problem would be finding anyone who'd want to buy them...

[GrayHare]

Might be the Dogs of the Dow have performed poorly in recent years because large cap stocks have performed poorly. So far the 2011/12 Dogs like BAC, JPM and AA are doing well.

[NW-Bound]

Quote:

Originally Posted by NW-Bound I first heard of this strategy perhaps 12-13 years ago. The premise of this sounded quite reasonable, and I made a mental note to study it a bit more. Then, I promptly forgot about it. About 5 or maybe 7 years ago, I ran across a book on this, authored by the Motley Fool, at a used bookstore for a couple of dollars. So, I bought and read it. There were a few different variations to this, as they tweaked it to see what worked out the best using historical data. Since the book was not current even then, I wondered how the method had been working. So I surfed the Web, and found out that the Motley Fool conceded that it did not work as well as when they first backtested the strategy for the book publication, and they did not recommend it anymore. Just now searched the Web again, and saw several mentions of it. I guess since the Dow beat the S&P in 2011, there will be a revival of this now.

Damn! My memory is good!

The book by the Motley Fools was published in 1996. I just found it on a shelf. Its title is "The Motley Fool Investment Guide". On page 86, there is a table showing what one would get after 20 years, by putting an initial $20K into different investment vehicles.

T-Bills	$36K
Ave MF	$85K
S&P500	$167K
Dow Ten	$398K
Dow Five	$856K
Foolish Four	$1,791K

Note that the last two are refined and tweaked versions of the Dow Ten to pick only 5 or 4 stocks out of the original 10 Dogs of the Dow. The details are in the book.

Sandwiched into the book, I found a printout of a Web page that I had made. It was dated 2004. That was when I bought the book (8 years old by then), and decided to surf the Web to find out if there was any update.

Damn! If my memory is not 100%, surely I have other records to substantiate what I claim. That Web page itself was written in 2000. It was already 4 years old when I found it. In the summary, Tom and David Gardner said

More extensive long-term studies completed by our staff show that the strategy hasn't beaten the market by as much as it did in our original 25-year sample. Over the past 50 years, Foolish Four outperformance was less than 2% annually. While still attractive, the approach is suspect in light of the recent changes in the Dow. The addition of non-dividend paying companies and a waning interest in dividend income have caused us to doubt that the strategy will consistently outperform the stock market's average in the future.

So, while the Dogs of Dow strategy may not be trouncing the total market as their original data shows, it may still have some merits. If one is interested, he might be able to surf the Web to find more recent return results.

And about the retraction by the authors, that Web page is still up. You can read it here. I myself do not feel comfortable holding 10 stocks, leave alone 4 or 5.