A UK version of "Beating the DOW"

Oliver Keating wrote: > I don't know if anyone is familiar with Micheal O'Higgins > "Beating the DOW" strategy, whereby each year you invest in > the 5 cheapest of the top 10 highest yeilding stocks in the > DOW Jones Industrial Average, a method of producing > historically annualised 20% gains...

It has never been attributed to any individual and around here is referred to as the "Dogs of the Dow" theory. That some presumptuous author has claimed it as "his own" is only a matter of presumption and not of reality. Further, the historical returns have been rather less than those you suggest, including many *negative* years, although the basic point of "bang for the buck" that you are getting at has remained true *anyway* despite the defects noted.

You noted some of the *cultural* factors which make it difficult to apply the formula in your social environment. A narrowing of the FTSE to its larger companies could be an obvious first step toward overcoming *some* of those cultural differences. That won't address, however, the cultural differences between relating dividends to purported "earnings" as in the UK, paying on a wholly random and rare basis (twice a year at times which make no particular sense whatever to income recipients), versus the general American practice of *striving* for predictability and regularity on a quarterly basis almost regardless of fluctuations in reported "earnings". It is unwise to try to gloss over social and cultural differences as profound as that between a "screw the stockholders" royalist attitude which has been present in the UK in perpetuity and a formerly responsible "provide predictable income to owners" attitude which *was* prevalent in the United States prior to the rampages against America of His British Lordship the criminal mastermind Greedspan carrying out his Plan to Bankrupt America by stealing all of the capital out of American capitalism. In fact there is increasing doubt whether the Dogs of the Dow Theory is going to continue working with the de facto bankrupt status for many of those "large companies" engineered by Lord Greedspan with his criminal theft system of "stock buybacks" at ludicrous multiples of net tangible equity. Another key cultural difference which may impede your efforts to develop an equivalent is the lack, to the best of my knowledge, of anywhere near the depth of financial reporting *required* in the United States by the Securities & Exchange Commission. I have read numerous of the putrid pretenses of financial reporting by UK based companies and frankly am appalled that your government has allowed such rapacious nondisclosure and subterfuginous misrepresentation to be the *standard* approach. In the United States, for all the fraudulent obfuscation by certain of those same "Dow stocks" (because they're "big" they consider themselves royal and incapable of being chastised for their criminal abuses of cash paid public stockholders), we have a rather general set of practices of full and adequate and fair and *accessible* financial reporting by the vast majority of companies. Bottom line, I think the cultural differences are not surmountable, that they are indigenous and unavoidable in any "your lifetime or mine" kind of time frame. Boob :-)##

Have you covered your nut yet this year? If not, may I suggest researching

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whit

A UK version was tried out, by Johnson Fry back in the 1990s and by Motley Fool more recently. Both failed for various reasons.

You can read about the Foolish version on their website

under the title "Beat the Footsie". A more successful approach has been the High Yield Portfolio system, which again you can read about on Motley Fool, where they have a discussion board of that name.

The Daily Mail is conducting such an experiment. The 'dogs of the FTSE'. All they're doing is investing in the top ten yielding shares in the FTSE and exchanging stocks that fall out of the top ten.

So far they're beating the index as a whole. You have to keep an eye out in the Sunday pullouts, bcos they only update it from time to time.

You might be able to find up to date details somewhere on their website,

Well, I take it from that you prefer the steady dividend approach... but it is not without its problems. In a year of bumper profits American corperations are unlikely to raise dividends for fear of not being able to cover them in future years.... therefore instead companies holding onto the cash generated are frankly quite likely to do something stupid with it like attempt an aquisition, or other venture whose return is very questionable. Companies who pay out large dividends in relation to their earnings are disciplined in only retaining what is required for reinvestment to maintain the companies position, and maintain efficient running of the core business. The FTSE-100 companies do pay out more dividends than the DOW companies, average yeild for the FTSE-100 is 3.6% with the DOW at 2.2%, which could be down to differences in price, although it seems likely both markets are currently slightly overvalued, and this is borne out by recent sensitivity to economic data.

Your own famous Warran Buffet came up with a "dividend test" - companies should only retain earnings if the increase in value to shareholders exceeds what a shareholder would gain by investing that dividend in a S&P 500 index. Most companies fail this test.

I have said it before and I will say it again, dividends are important, the flow of money in the stock market simply cannot go in one direction, contrary to what some may think. It will flow from investors to companies, but one day, somewhere down the line, it must flow back. Companies earnings are inherently unstable, the attempt by American corperations to maintain stable payments simply by making very low payments seems inherently flawed.

Of course, stock-buy-backs are all the rage now... but I completely fail to see how these can help the shareholder... there may be fewer shares outstanding, but since an important asset - cash - has been used up in their aquisition, surely this reduces shareholder equity by a proportionate amount, unless shares are trading at a discount which certainly hasn't been the case for a large number of years.

Oliver Keating wrote: > Well, I take it from that you prefer the steady dividend > approach... but it is not without its problems.

Quite so, especially for naifs who become excessively *reliant* on the flow of dividends. I was talking with one gentleman recently who was trying to arrange dividend flows to come out precisely the same each and every *month* by choosing stocks on the basis of when on the calendar they pay their dividends. Instead of rational

*budgeting* on no shorter than a quarterly basis and picking stocks for their *value*, he wanted the artificiality of having somebody else do his budgeting for him. He totally disregarded the reality which is that nobody's dividends are all *that* predictable. They can be cut, reduced, slashed, even eliminated entirely at the whim of the Board of Directors. The best one can do is to go for quality of things to own and make sure one has at least adequate if not *ample* cash reserves (and they do have to be *cash* reserves, none of this fraudulent nonsense the Wall Street Journal editorial writer was spewing about "stay fully invested and *borrow* against the stocks when you need cash"). It is somewhere in the range of unwise to suicidal to depend too much on dividend flows and timing. I was not expressing a personal preference but only describing the cultural environment in which the American pattern of dividend payments was developed, the concern for stockholders implicit in that older way of doing things with efforts to be predictable. In fact 78.6% of my stocks do pay at least "some" dividends, but it is never a criterion of mine *that* they do and certainly not on what schedule they do it. One of my best dividend payors is in fact a company which also does the semiannual thingy that is common among UK companies. No problem. I budget on a 3-5 YEAR basis, not on any silly monthly or quarterly nor even annual basis. I don't "count on" cash flow from dividends until it is in fact in my hands and cleared through the banking system (actually did have one check issued by a company now bankrupt which would have bounced if I had deposited it prior to seeing the notice that they had squandered so much money on fraudulent transfers to criminal cronies via "stock buybacks" that their bank shut off their credit line and was refusing to honor the dividend checks, an unusual situation which has only happened once in my nearly 44 years trading stocks). But in any event, I don't "count on" money until I've actually got it.

They can't. They are in fact nothing but criminal theft by insiders fraudulently giving away all of the stockholders equity to their criminal cronies who fraudulently positioned them at the tops of major companies "worth looting and gutting of value". My article

goes into more depth on how to compute "how much" is being criminally stolen by the frauds who engage in those "stock buybacks" at ludicrous multiples of net tangible equity. Unfortunately, our regulators have become so criminally corrupt with the theft process (because *their* bosses the criminally corrupt legis critters just

*love* all those campaign contributions from criminal gangs engaged in the theft of stockholders equity out of American companies) that nearing three hundred major American publicly owned companies have become de facto bankrupt (real liabilities in excess of real assets) mostly as a result of such criminal thefts.

It reduces shareholders equity by an entirely DISproportionate amount (the point being to fraudulently transfer all of the equity to the criminal cronies of munchiment). I had seen only four (count them . . . 1 2 3 4 . . . that's all folks) legitimate stock buybacks at or below net tangible equity in the past decade or two out of the thousands upon thousands of such euphemistically named "stock buybacks" which never were anything but criminal theft. Reviewing one of those four companies today, I found that they have continued the practice of stock buybacks in such a way that they are now clearly into the net negative realm of having made Greenmail Payments to cronies to the detriment of continuing stockholders. That particular one isn't anywhere near as bad as the companies which have driven themselves into de facto bankruptcy via those fraudulent transfers, but it has gone negative after only a year or so of getting praise from me for doing a legitimate buyback. It is a particularly rapacious practice whose only purpose is what it was back in the 1926-1933 era when the practice was invented: stealing all of the capital for favored criminal cronies and then running the resulting de facto bankrupt trash heap through the bankruptcy courts to wipe out the cash paid public stockholders.

One classic situation where I already had reason to understand how the company was structured was the former Amoco which was acquired for stock by British Petroleum. At their first post merger report, the frauds of BP sent to me a nothing-content puff piece about their abusive selves totally devoid of any of the factual content needed to evaluate the resulting post merger company. I telephoned them and asked for the real report complete with footnotes to cover all of the real situation. "Oh sure, even though we as a now British company are not required to disclose anything whatever". Weeks later when I called again after nothing showed up "Oh golly, we sent the full version, but we'll send another copy, but we're really not required to tell you anything since you're an American and we're now a British company". Weeks later after yet again nothing showed up, same thing, at which point I disposed of the fraudulently and abusively nondisclosing craporation which was by then in full control of my former adequately reporting Amoco. For more complete clarification of this, have a look at the SEC web site shown in my sig lines for any American company as compared to what is reported for a UK company whose shares are traded in the United States. You'll find a megabyte or more in the Forms 10-K complete with detailed footnotes explaining many of the things that need explaining in the reporting of the American company. You'll find less than a fourth of that, totally devoid of any of the relevant footnotes, for the UK companies. It is a difference not only of standards of reporting but of attitudes towards the owners (some deference to ownership even in companies whose munchiments are criminally stealing all of the equity among American companies subject to SEC reporting requirements while an attitude of "we are the Lords of the manor and you stockholders are mere serfs to serve our desires for capital to steal" among the UK companies). For all the centuries which have passed since the original South Seas Bubble when at least one company was underwritten in London "for purposes to be of great advantage but nobody to know what it is" (basically exporting the swindler running the company to the south of France to spend the rest of his days there), there remain quite significant cultural differences which I perceive as indigenous and unavoidable in any "your lifetime or mine" kind of time frame. Incidentally, the Dogs of the Dow approach to "simplified investing" has never appealed to me and appeals even less now with the increasing numbers of de facto bankrupts among major publicly owned corporations. Similarly, no Dogs of the FTSE approach would ever appeal to me, regardless of how empirically "justified" it might appear at the time of its original presentation. With the increasing complexity of the world and the increasing dishonesty of corporate munchiments (read that as opportunities and orientation towards stealing stockholders equity for personal and criminal crony enrichment), I have less willingness than ever for "simplisticity". Boob :-)##

Have you covered your nut yet this year? If not, may I suggest researching

instead of listening to hypists in misc.invest.stocks? If you wish to email me go to

"Andrew Martin" wrote in message news:d3ted7$kel$ snipped-for-privacy@newsg3.svr.pol.co.uk...

The Motley Fool started a "Beat The Footsie" portfolio in 1997, based upon the same strategy. The final report on the now discontinued BTF portfolio includes the following comment:

"The outcome? A complete disaster. After five years the original 6,000 invested in the BTF back in October 1997 is now worth 3,877, a fall of

35.4% against our benchmark comparison of the FTSE100, the total return version which includes reinvested dividends and which over this time has fallen 18.8%. Remember, the BTF includes all the reinvested dividends received in that time and that the shares held would have been high yielders compared with the index. Therefore if you deducted all the dividends over the last five years to look at the underlying capital performance of the shares it is shockingly poor."

See for full article:

Cheers Andrew Kay

Could prove interesting to see what the mail end up with then. They were beating the FTSE100 with a good margin last update.

Two things I will say

1. MF used companies in the FT30, to try beat the FTSE100. The comparison should have been drawn against the FT30 not the FTSE100.

1. Yet again Ben Graham has been proved right. The biggest threat to an investor is himself (or herself). When times got bad, they paniced and packed up shop.

I think it's called cutting your losses. What's wrong with that?

That's incorrect.

5 years is sufficient time to analyse an investment strategy.

It made a large loss over this period compared with an investment in index so there was no point in continuing.

Daytona

Are you sure they didn't cherry pick the 5 years? In the US at least that was probably the worst time ever for dividend paying stocks and a time when hi-flying tech stocks had their biggest influence ever on the major averages during the bubble. That was in all likelihood a once in a lifetime event.

Don't be silly.

They started a number of mechanical investing strategies when they started TMF UK.

That's why they used a benchmark, the FTSE 100 index, both including & excluding dividends, so they're comparing like with like. They explained this clearly in the article.

Over 5 years -

Excluding dividends the scheme lost 35.4% compared with the FTSE 100 index Including dividends the scheme lost 18.8% compared with the FTSE 100 Total Return index

Daytona

5 years is not even a business cycle. How can that be enough time to possible test a strategy?

I'll tell you what happened, the stocks were bought nearing the top of the dotcom bubble. The bubble popped and that was that.

I know it says that clearly in the article.

All I'm saying is if they wanted to compare the stocks to the FTSE100 then they should have picked the dogs of the FTSE100 not the FT30. I could have told you 5 years ago the dogs of the FT30 would underperform the FTSE100.

Granted the stocks picked underperfromed the FTSE100, but does any1 know how they performed in relation to the FT30.

You seem to have a laughably high opinion of your own ability to forcast the future.

Daytona

Spot the contradiction ?

The problem with these whacky theories is that they work nicely in back testing but don't seem to work so well in practise - except to make money for people who write books. In theory the dogs are supposed to be undervalued by some kind of mechanical calculation (this takes personal opinion out of the stock picking) but the MTF had dogs like M&S which had a poor value because, quite simply, they were dogs. The strategy can only work if the theory of perfect markets is deeply flawed. The theory requires a certain amount of churning which eats into profits due to commissions.

The MTF BTF, like many funds, didn't aim to make a profit (which is nice too) but to beat a certain index they were tracking. This is the mark of a good funds manager. For example a European Growth Fund may benchmark against the Eurostox 500 index. The fact that the BTF failed so badly under real testing proved the maxim that past results are no guide to the future.