Who let the dogs out? Yes, we know that it sounds corny but we could not help ourselves. The Dogs of the Dow is a strategy that we came across while listening to some Optionetics audio material. The waythey described the system was to buy the five (5) worst performing members of the Dow Jones 30 industrial average for the previous year on January 1 and keep them for a full year. The rationale of this method is that most money managers think that a stock is cheap if the P/E ratio is at a historical low. Since they like value plays they will buy those stocks as they represent good “value.”
A second variation of the Dogs of the Dow is to buy the five or ten companies (depending on your available capital) that have the highest dividend yield in January 1. You are supposed to keep those companies in your portfolio for a full year and then do the whole process again in January of the following year.
This strategy has had great success in the last 35 years. You win in two ways: by collecting the dividend yield payment and by the stock appreciating.
The drawback of this strategy is that requires lots of capital. For example a portfolio of 100 shares each of the 2008 dogs would have cost about $14000 in January 1,2008.
However, we can reduce the cost of implementing this strategy and boost its return by doing the following:
1. Buying the stock and selling the out of the money LEAPS (long-term options with 9-12 months to expiration).
2. Buying the stock and selling the out of the money calls each month.
3. Buying the at-the-money LEAP calls for each stock.
4. Establish a bull call spread with LEAP options.
Feel free to paper trade these strategies to see which one fits your style and risk tolerance (risk aversion for all CAPM enthusiasts) .
For more information on this strategy, you can go to www.optionetics.com and www.dogsofthedow.com.
PS. The dogs of the Dow for 2008 took a royal beating in the stock market. GM went bankrupt. Trade the system with caution. Hedge the positions or add stops where you feel prudent. Preservation of principal is key in this environment.
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I am a dad, professional engineer, MBA student, and a financial fanatic. I can help you make money in the stock market. I use Fibonacci techniques for retracements and targets, technical analysis, some little fundamental analysis, and automated systems trading. I also trade options. In addition, I use CANSLIM to get neat growth stock ideas. No fluff and no BS.
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This is so interesting)) I’m new to this field and only learning)) thanks for the information)))
There’s all this talk about economic recovery like it was a good thing. The last thing we want is to return to how we were, with the banks in charge because they’re the only money supply. We have to end that monopoly and have a publicly-owned supply of money.
A good book to read about the history of the Fed is the Creature of Jeckill Island. I highly reccommend it. there is talk about adding more layers of bureaucracy to the Fed (Government oversight). Do you think that is the right solution?