| A funny thing happens on January 2nd of every | | | | Merck, General Motors, DuPont, General Electric, |
| year. Hundreds and thousands of investors wake | | | | and JP Morgan Chase. |
| up and run to their computer like it's Christmas | | | | A basket of these stocks, one share each, would |
| morning. They're in a huge rush to do a few quick | | | | have cost approximately $427.50 and you would |
| calculations and determine their investment | | | | be able to sell them today for $424.12. Including |
| strategy for the new year. Based on this little bit | | | | dividends the strategy returned a measly 3.5%. |
| of math they blindly make all of their investment | | | | The Dow as a whole is up this year almost 7% . . |
| decisions. | | | | . not including dividends. |
| It's a simple strategy. With a strategy based on | | | | Just investing in the Dow outright would have |
| the stocks that make up the Dow Jones Industrial | | | | produced better results than following the "Dogs" |
| Average, these investors are looking for high | | | | strategy. Why did the results in 2007 fail so |
| dividend yields. Their hope (like very investor) is | | | | miserably after such a good 2006? You can |
| to outperform the market. | | | | directly tie the poor results this year to two |
| So, what strategy am I talking about? | | | | stocks Citigroup (C) down 47% and General |
| The "Dogs of the Dow" investment theory of | | | | Motors (GM) down 17%. |
| course. In 1991 Michael O'Higgins published a book | | | | A wolf in sheep's clothing? |
| called "Beating the Dow." Michael, accordingto his | | | | In reality this famous trading strategy is a simple |
| own biography, is widely considered one of the | | | | one. It's a very basic value strategy. These |
| best investment managers in the US. He started | | | | stocks are traditionally trailing the market but still |
| on Wall Street in 1971 and founded his own | | | | have great businesses with some inherent value. |
| money management firm in 1978. In this book he | | | | On the whole, they tend to be out of favor for |
| put forth a very simple strategy of buying the 10 | | | | some reason. This makes them value plays. Ah, |
| Dow stocks with the highest yields. | | | | but we know value investing tends to |
| Over the long-term, say 15 years, the Dogs of | | | | time...sometimes more than 1 year. |
| the Dow strategy had outperformed not only the | | | | And right now, the market is favoring growth |
| Dow Jones Industrial Average, but the S&P | | | | stocks. |
| 500 as well. Sounds great, huh? | | | | So here we are at the last trading day of 2007. |
| The problem . . . it doesn't work so well anymore. | | | | Tomorrow, a new batch of stocks get selected |
| In the last 5 and 10 year periods, the strategy | | | | for the Dogs of the Dow and investors the world |
| actually underperformed the market. In the go-go | | | | over start their investing strategy all over again. |
| days of the internet, people were less focused on | | | | I suggest you leave the "dogs" to someone else. |
| traditional businesses that paid dividends. As a | | | | Resist the urge to select stocks purely on one |
| result, the strategy failed to beat the averages. | | | | data point - it will save you lots of pain down the |
| Further, in 2004 and 2005, the strategy failed | | | | line. Look at the strategic reasons behind each |
| again - miserably. | | | | investment rather than blindly following a general |
| Then in 2006 the strategy performed well, | | | | strategy. |
| outperforming by 10%. This, unfortunately, | | | | You should never just buy or sell a stock only |
| brought renewed life to the Dogs of the Dow. | | | | because of its yield, try to understand the |
| In 2007 the results were again unimpressive. The | | | | company and its industry. With a little additional |
| top 10 companies selected this year included: | | | | research I truly believe savvy investors can beat |
| Pfizer, Verizon, Altria, AT&T, Citigroup, | | | | the market over the short and long term. |