Dogs of the Dow?
On my way to work this morning, I heard Bloomberg radio (yes, I alsmost never dailed any music channel) mentioned a mutual fund that has a 12-month return of 18% (maybe the number I remembered is a little bit off, but it's in that area). The return was great but I think there are plenty of funds have that number. What caught my attention was that the radio said the fund manager is the only one still using the so-called "Dogs of the Dow" theory as the fund's investment strategy.
Really? The only one?
I couldn't remember the fund's name, so I had to follow the link on Bloomberg.com to find out that the fund mentioned is Hennessy Cornerstone Value Fund (HFCVX). The "Dogs of the Dow" is a stock-picking strategy and it does is to select ten out of thirty Dow stocks each year that paid the highest divided. The idea behind the theory is that these ten stocks were most likely out of favor, therefore they should have lower P/E ratios, making them better investment choices.
The idea sounds fine to me and according to DogsOfTheDow.com, the "Dogs of the Dow" is
a technique that would have given you a 17.7% average annual return since 1973! … especially considering that the Dow Jones Industrial Average overall return was 11.9% during that same period.
If there's any good technique that guarantees a surprior return, everybody wants a piece of it. Follow the publication of the idea by M. O'Higgins in his book, Beating the Dow, in 1991, more than $20 billion were invested in mutual funds based on the dogs' theory by mid-1990s.
However, as B. Malkiel put in his book, A Random Walk Down Wall Street
once a lot of investors started playing the game, success bit the dogs.
Well, since this whole idea is out of favor (only one fund manager is still using it), it may be good for the fund's investors. At least now the street is not that crowded any more.
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