Strategy Review

As readers know from my stock book, the Dow 1 strategy is automated. It chooses the second-lowest-priced of the ten highest-yield Dow stocks each year.

Last year, the stock was Pfizer (PFE). It returned 11%. This year, the stock is General Motors (GM).

While technically you should have already bought the stock if you’re following this strategy, taxes make it wise to hold a little longer than a year to pay just the 15% capital gains tax on the sale of last year’s stock (Pfizer). If you sell within one year, you pay your normal income tax rate, which is almost always higher, usually much higher.

So, if you’re following this strategy, I suggest entering a limit order to buy GM at $30. It closed Friday at $30.24, so a slip of just 0.79% will bring it down to $30, which is sure to happen.

The bigger issue, however, is whether it’s worth implementing the Dow 1 at all. It’s the best of the old Dow strategies, but I show in my book that my doubling approach is superior to all of the old strategies, the Dow 1 included. In fact, it was specifically to beat the old Dow strategies that I spent considerable time researching a new one.

I follow the Dow 1 in The Kelly Letter and on this site mostly as a tracking mechanism, to show how excellent Double The Dow and Maximum Midcap are. Some people use it in their portfolio, but I don’t recommend it. It’s not that it’s bad, it’s that I’ve found something better. Compare the annual returns since I began tracking these strategies:

The Dow 1
2003: +45% | 2004: -1% | 2005: -13% | 2006: +11%

Double The Dow
2003: +51% | 2004: +5% | 2005: -4% | 2006: +29%

Maximum Midcap
2003: +60% | 2004: +29% | 2005: +19% | 2006: +10%

In view of the above, you’ll probably agree with me that we’ve built better mousetraps. The Dow 1 is a great milestone on the timeline of investment progress, but we’re past it now. As long-term, permanent strategies, Double The Dow and Maximum Midcap are better.

There may be a tactical reason you want a single Dow stock in your portfolio. If so, use The Dow 1 as a useful guide. If you’re just looking for a permanent portfolio, however, don’t bother with it.

This just in…

The end of this weekend’s “The Trader” column in Barron’s examined how various investment strategies fared in the past year. Merrill Lynch says that picking the 50 stocks in the S&P; 500 with the least analyst coverage would have produced a 24.6% return. Evidently, that was the best strategy from 40 that Merrill’s quantitative strategists compared.

Low ratio of price to cash flow generated a return of 23%. High dividend-paying stocks climbed 21.7%.

Birinyi Associates found that buying stocks with the lowest projected growth rate over the next five years earned an average return of 26.5%.

Notice anything interesting about all of those numbers? They’re all lower than the performance of my simple Double The Dow strategy. It returned 29% last year, and didn’t require anything as nutty as buying 50 different stocks.

Why hasn’t anybody else picked up on these excellent doubling strategies? Beats me, but I’m glad they haven’t.

Stick around here. It’ll be good for your wealth.

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