From: gts (gts_2000@yahoo.com)
Date: Thu Jun 12 2003 - 16:58:43 MDT
Gary Miller wrote:
> This system claims to have averaged 17.7% annual return since 1973...
> From http://www.dogsofthedow.com/
I took a closer look at this trading strategy for your sake, Gary. It is not
immediately clear from the website that anyone actually followed the
strategy since 1973 (probably they are quoting a theoretical annual return
based on 20-20 hindsight) but in any case it is very obvious why it would
have worked so well since 1973.
The strategy is to buy the highest dividend stocks in the Dow at the
beginning of each year, and then sell them and rebuy the highest dividend
stocks again at beginning of each new year. This strategy would have worked
wonderfully since the 70's for the simple reason that interest rates have
plummeted. I don't remember the exact figure but the yield on the 30 year
treasury bond during the inflationary 70's peaked well into the double
digits. Today it yields a meager 4.21%
Stocks that pay high dividends outperform the market when interest rates are
declining because the risk of owning dividend paying stocks becomes more
acceptable to investors seeking current income. People and institutions in
need of income sell government and corporate guaranteed bonds and cash out
of interest earning bank accounts to buy the riskier but higher yielding
stocks. In particular they are attracted to high dividend stocks in the Dow,
because these are large low-risk companies.
If interest rates rise again to levels seen in the 70's then the opposite
will occur and those who follow this trading strategy will get creamed. The
strategy will underperform the market by as much as it has outperformed it.
To make matters worse, the stockmarket itself is likely to fair poorly if
interest rates rise. There is nothing more painful than underperforming the
market while it is declining.
> I wish I had followed this system instead of being greedy and
> investing exclusively in technology stocks!
If you are considering the possibility of following this strategy then the
questions you need to ask yourself are:
1) "Do I think interest rates will continue to decline over the long term?"
2) "Am I really so smart that I should risk money on my predictions about
interest rates?"
I always have an answer to the first question but as someone who accepts the
efficient market hypothesis I never answer yes to the second question.
I won't make a prediction about interest rates here but I will say that I
really hope they don't decline very much from current levels. We are not far
from sinking into an economic depression. It was for this reason that
Greenspan and his cronies at the Fed decided not to cut the discount rate
last time around.
-gts
This archive was generated by hypermail 2.1.5 : Thu Jun 12 2003 - 17:06:05 MDT