Titre : 'BEATING THE DOW'
Auteurs : Michael B. O'HIGGINS & John DOWNES
Publication : mars 2000
Editeur : HarperCollins
ISBN : 0-06-662047-3
Nombre de pages : 300
Prix : 115,32 francs (ou 17,58 euros)
4ème de couverture
"By using this approach it is possible to be successful regardless of the direction the overall market takes." - New York Times
In 1991, Michael B. O'Higgins, one of the nation's top money managers, turned the investment world upside down with the first publication of his book Beating the Dow. In it, he proposed an ingenious strategy that showed how all investors - from those with only $5,000 to invest to millionaires - could beat the pros 95 percent of the time by putting 100 percent of their equity investment into the high-yield, low-risk dog stocks of the Dow Jones Industrial Average. The book went on to become a bestselling investment classic and the formula spawned a veritable industry, including websites, mutual funds, and $20 billion worth of investments, elevating the theory to legendary status.
In this new edition, the must-have classic is updated and completely revised, reflecting on the greatest bull market of our time and its overall effects on the stock market and updated for a new economy. With current company and stock profiles, as well as new charts, statistics, graphs, and figures, Beating the Dow is the smart investment that you - and your portfolio - can't afford to miss.
"O'Higgins data are persuasive." - Wall Street Journal
MICHAEL B. O'HIGGINS, ranked in the top 1 percent of all money managers in the United States, runs O'Higgins Asset Management, Inc., in Miami, Florida. He is also the coauthor of Beating the Dow with Bonds. JOHN DOWNES is coauthor of the bestselling Dictionary of Finance and Investment Terms and Barron's Finance and Investment Handbook. He lives in Piermont, New York.
When Beating the Dow was first published ten years ago, I knew its simple and obvious strategy, based on the resilience of temporarily out-of-favor Dow stocks, would win converts. As a money manager, I had used high dividend yield as a contrarian strategy in all kinds of markets, and its record of consistently out-performing the Dow and most mutual funds was impressive.
At the same time, I expected the simplicity of the strategy would meet with skepticism in a financial community addicted to the notion that anything as important as managing money had to be complicated. There was also the simple fact that contrarianism - buying when others were selling - runs against human nature. And even if individuals could be persuaded that Dow stocks had more resilience than risk, the full-service brokerage establishment would certainly be inhospitable to a formula system that rendered its advisory services unnecessary.
To my own astonishment, and to the credit of my colleagues in the professional financial community, Beating the Dow became the investment discovery of the nineties :
- Average investors moved in droves into a system that featured household names like General Electric and Eastman Kodak. Books and articles began appearing that embraced the system and expanded the underlying research.
- Enterprising financial web sites took the idea and added their own variations.
- A consortium of leading brokerage firms, adapting a legal vehicle traditionally associated with municipal bonds, created the first equity unit investment trusts. Called defined asset funds, they began by holding Beating the Dow portfolios. Then they expanded on the concept, using foreign stock indexes and other portfolios comprising high-capitalization stocks not in the Dow. Equity unit trusts have now become an important industry, led by companies like Merrill Lynch and Nike Securities L.P., with its First Trust products for regional brokers nationwide.
- Mutual funds also began appearing, combining Beating the Dow portfolios with other investments such as SPDRS and zero-coupon bonds.
- The popular newsletter Beating the Dow was a direct out-growth of the book.
- Barron's, the Dow Jones business and financial weekly newspaper, began following the system on a regular basis, popularizing the term 'Dogs of the Dow.'
Ironically, 1990, the year Beating the Dow was first released, became the first year in our twenty-six-year research period that the system had a significant negative return. Saddam Hussein's invasion of Kuwait and the prospect of war in the Persian Gulf caused a temporary market plunge affecting cyclical stocks in particular. But the following year, 1991, was the second best year in the system's history, led by a 61.9 percent total return for the Beating the Dow Five-Stock portfolio.
It is equally ironic that as this revision is about to go to press nearly a decade after the first edition, the system seems headed for its second significant off-year. The problem is not too much popularity. Overly widespread use of the system would cause the Beating the Dow stocks to move as a group and there is no evidence this has happened. In 1998, for example, three of the Beating the Dow five stocks outperformed the Dow, one significantly underperformed and another had a negative return. The reason for a lackluster 1999 is that superannuated bull market, supported by steady economic growth and low inflation, has relegated "value stocks" to the sidelines while high-capitalization growth stocks, especially those in computer technology, have been bid up dangerously overpriced levels.
Prolonged bull markets breed complacency, spawn "new era" theories that support overvaluation, and make value stocks - stocks that are temporarily depressed because of cyclical earnings or other problems - less attractive than stocks with momentum.
Beginning in 1995, we have been witness to a two-tiered market. The "blue chip" indexes and averages, especially the price-weighted Dow, have been elevated to unprecedented heights by a handful of overpriced and unduly risky stocks, while the rest, on average, have underperformed.
In 1998, for example, the Dow Jones Industrial Average had a total return of 17.9 percent, led by four stocks : IBM, with a closing price of $185, gained 77 percent. Merck closed at $147 and gained 41 percent. General Electric, priced at $102, gained 40 percent. Wal-Mart, at $89, gained 107 percent. Those four stocks had price-earnings ratios of 30, 36, 38, and 44, respectively. The Dow's historical price-earnings ratio prior to this bull market was 15.
Another bull market phenomenon has made it more difficult to identify out-of-favor stocks using the high-yield criterion. Combined with the lower long-term capital gains rates provided by the Taxpayer Relief Act of 1997, the extended bull market has made it tax efficient for companies to remunerate shareholders by repurchasing their own stock. With earnings per share spread over a reduced number of shares, share prices rise on the wave of the bull market, giving shareholders favorably taxed capital gains instead of fully taxable dividends.
The effect of stock repurchases has been to reduce dividend yields and force them into a tighter range. This has made the dividend itself a less important part of the total return, and with stocks differentiated by fractional differences in dividend yield, it has become harder to separate the companies that are out of favor from those that may be using their cash in other ways.
Actual stock repurchases under formalized stock-buyback programs can be treated as dividend equivalents, but not all stock buybacks are designed to compensate shareholders and considerable analysis is often required to quantify those that are.
Finally, the Dow itself has become more growth stock-oriented. In November 1999 we saw the deletion of four yield stocks - Chevron, Goodyear, Sears, and Union Carbide - and the substitution of one, SBC Communications, Inc. Of the other three substitutions, Microsoft, pays no dividend and Home Depot and Intel Corp. have a nominal payout. This makes the overall Dow harder to beat with dividend paying stocks.
So for all the above reasons, what has been a simple way of beating the Dow over many years has temporarily become less clearcut. But the operative word is temporarily.
Dividends will be back. They are a corporation's way of competing for equity capital and will be paid again when companies run out of excess stock to buy and when the end of this remarkable bull run makes capital gains harder to come by.
Value stocks will be back in vogue when complacent investors are reminded that high price-to-earnings ratios represent unacceptable risk. As this is being written, Janus Funds, one of the most successful mutual fund groups in the last few years, has just announced two new value funds.
And in the constant evolving of the business environment, which is reflected in the Dow, growth stocks become mature companies, cyclical companies diversify, and diversified companies return to basics, becoming cyclicals again and even growth companies.
Floyd Norris of the New York Times has always been a wise observer of the markets. In September 1999, he wrote a piece titled "1968 Redux : New Issues Are Hot, Value Stocks Are Not," which is particularly relevant. Here's part of it :
Over the last 18 months, an investor who carefully went through the stock market and chose a portfolio that was balanced among sectors and focused on the 10 percent of stocks with the lowest ratios of prices to earnings - in other words, a value investor - would have lost money.
But somebody who took the opposite strategy, buying only the stocks that were losing money or had the highest ratios of prices to earnings - in other words, the kind of companies that seem overpriced to begin with - would have a portfolio that rose 34 percent... The only other time that value stocks trailed by so much was in the 18 months that ended in June 1968.
There are differences between now and 1968. Then inflation was rising, and the Vietnam quagmire was worsenning. In the stock market, the expensive stocks that were flying high were generally smaller technology stocks with no profits but lots of hype...
But the similarities may be more significant. In 1968 the stock market had been rising, with only minor interruptions, for two decades, and the last recession, in 1961, was a distant memory. Many hot initial public offerings doubled the first day they traded. American households had a record 23.7 percent of their assets in stocks - a figure not exceeded until 1998, when it hit a 24.3 percent.
The lesson is that long bull markets and prolonged expansions breed complacency. In 1968, there was talk that central bankers could "fine tune" the economy to prevent recessions indefinitely. Now there is a "new paradigm" in wich technological progress assures inflationless growth.
Those who profited in 1968 were destined to suffer later, as the leading stocks of that market crumbled. The laggards of that era held up better, but virtually every stock was devastated in the 1973-74 bear market.
It is tempting to note that in 1973-74, when the Dow was down 36.2 percent, the Beating the Dow Five-stock portfolio gained 15.8 percent.
Beating the Dow is based on simple logic that will produce exceptional returns in any rational market and until excessive popularity turns contrarianism into conventional wisdom. The most effective preventative of that unlikely oxymoron is an occasional off year, like the one we're now putting behind us.
Michael B. O'Higgins
Table des matières
Acknowledgments ix Preface xi Introduction xvii Method of Calculating Total Returns xxi
PART I--INTRODUCING THE DOW STOCK SYSTEM 1 1 Keep It Simple ! 3 2 Why Common Stocks Are the Best Investment for Accumulating Wealth 7 3 Why Invest in the Dow Industrials ? 13 4 How the Pros Try to Beat the Market - and Why Most Don't Succeed 19 5 The Dow Jones Industrial Average 29
PART II--THE DOW INDUSTRIAL STOCKS 43
PART III--MARKETS AND CYCLES 163
PART IV--BEATING THE DOW 179 Introduction 181 6 Beating the Dow - Basic Method 185 7 Why High Yield and Low Price Work 203 8 Beating the Dow - Advanced Method 215
APPENDIX A - Recent Deletions and Substitutions in the Dow 261
APPENDIX B - A look at the Major Outperformers 283
Bibliography 291 Index 293