Two of these I can claim no credit for. They are based on or are variants of Michael O’Higgins’ “Beat the Dow” portfolios, better known as the Dogs of the Dow. For very conservative investors, I can recommend no book more highly than O’Higgins’ “Beat the Dow with Bonds.”
These portfolios are variants of the small dog portfolio. For those unfamiliar with the concept, it is very simple. One takes the 30 Dow stocks, on Dec 31 of each year, and ranks them yield. One then buys the ten highest yielding stocks (or top five in the ‘small dog’ variant) on the first day of theyear, and holds them till the end of the year, when the process is repeated.
It is basically a contrarian approach. The highest yielders, since all are major operations are (likely to be) good companies that for one reason or another have had their prices beaten down. Most people will limit their choices to companies that actually have earnings (I don’t remember now if O’Higgins includes that in the book) so that any greatly troubled companies are excluded. This was key last year as it kicked out some major losers.
Altho both the ‘Dog’ portfolios I use lost money last year, they lost less than Dow. Small comfort when confronted with a 25-30% loss, but outperformance is outperformance. Indexers lost 35-45%, so a 10+% performance edge is a great thing. Sort of like being shot in the leg is better than being shot in both legs.
Various commentators, websites, and gurus, most notably The Motley Fool, have given up on the Dogs. I think this is a mistake. The system has a long track record of outperforming the market as a whole, and the abandonment and castigation of the Dogs in the mid to late nineties strikes me as lunacy brought on by the insanity of that market.
Yes, the Dogs were not outperforming the bubble. But they’ve held up pretty well over the years, In this decade, they’ve outperformed the markets (and the major large-cap/index funds) every year, except 2005, and they were close that year. If history holds, this year should be excellent for them; IF (diclaimer: IF IF IF IF IF) we’ve hit the bottom and the market starts up again, these undervalued, beaten up dog should zoom. If the market doesn’t behave the way we want, they’re already discounted. Of course, they can go lower, but they have less excess to squeeze out than their higher valued cousins in the Dow.
The variant I like best is the four dog version. It’s a variant of a variant of a variant at this point, but it’s very simple. You take the five Small Dog and kick out the lowest priced stock. Then buy equal amounts of the survivors. This version USUALLY outperforms the basic Small Dog portfolio and last year was no exception. The four dog port lost around 25% to the five dog port’s 28%. Not astounding, but 3% is 3%; over 20, 30, 50 years, whatever your investing horizon is, it’s thousands and thousands of extra dollars.
The third portfolio is based on a similar approach, but takes an even more value oriented approach. It’s also very simple. On the last day of the year, run a list of the top ten yielding stocks in the Dow. Then run a list of the ten lowest P/E stocks. Compare the list and note the ones that are on both lists (usually 3-5 stocks.) Then buy an equal amount of each (but no more than 50% of the portfolio in any one stock- in other words, if there’s only one stock that qualifies, put 50% in a one year T-bill or CD.) Wait for the following Dec 31st , then repeat. I have NOT tracked this system recently, but used it during the early nineties when I was doing serious stock investing. During that period, during which the Dow grew by about 25% (or around 8% a year), this approach yielded growth of about 12-15% (sorry, but those records are lost in the mists of time and I’m winging that from memory- but they did more or less double the Dow return each year; DISCLAIMER: Past performance is no indicator of future results… do not try this at home without medical supervision!)
Again, not to overdisclaim this, but these are NOT recommendations to buy/sell/trade any of these stocks. These are model portfolios presented for informational purposes only. Use the portfolios and the ideas presented here to stimulate your thought processes, do your own research and investigation, and then, and ONLY then, make your own investment decisions. If you try to blindly emulate these portfolios, all you’ll get from me is some mild sympathy and maybe a drink if you corner me in a bar!
All that said, here are the three portfolios for today (with YTD (whee) results):
(Click for larger version)
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