dogs – Scalper1

The Average Joes Of The Dow

Summary We all know about the Dogs of the Dow. Last week I wrote about the Dow’s lowest-yielding stocks – the Gods of the Dow. The next step was to look at the middle-yielding stocks – the “Average Joes of the Dow.” See the results. In the past week I released an article, exclusively on SA, called ” The Gods of the Dow .” The main thrust of the article was to compare the performance of the 10 highest-yielding stocks of the Dow (the Dogs) against the 10 lowest-yielding stocks (what I called “the Gods”) over a decade. The Dogs won the contest by quite a margin. Here is a summary chart showing the performance of the investment strategies. The next logical step is to see how the middle 10 stocks of the Dow would perform. I call this cohort of stocks the “Average Joes of the Dow.” I am having a bit of fun running these tests, but I do believe these 3 groups – the Dogs, the Gods, and the Average Joes – act as rough proxies for value investment, growth investment and the middle ground in between. The Average Joes of the Dow Investment Strategy On December 31, buy the Dow’s 10 middle-yielding stocks. Hold these stocks for a year. Sell the 10 positions on December 31 the following year. Repeat the above process annually. Note: Stocks that are dropped from the Dow during the course of the year are still held until year-end — e.g., you would still hold AT&T through December 31, 2015, if you had purchased it December 31, 2014. Another note: The data for the test comes from the “Dogs of the Dow” website. I am not sure what would happen in the event or a merger or acquisition. A current example would be Pfizer: Allergan has proposed acquiring Pfizer in 2016. If you bought Pfizer on December 31, 2015, you would most likely sell the merged company or acquirer on December 31, 2016, but I am uncertain as to how such events were handled in this historic data set. The Dogs of the Dow Investment Strategy The same as above, but you buy the 10 highest-yielding stocks of the Dow year after year. The Questions What was the annual performance of each strategy on a total return basis? What was the overall performance of each strategy over a 10 year period? Some Sample Data The Dogs of the Dow on December 31, 2014 were: (NYSE: T ) AT&T 33.59 5.48% (NYSE: VZ ) Verizon 46.78 4.70% (NYSE: CVX ) Chevron 112.18 3.82% (NYSE: MCD ) McDonald’s 93.7 3.63% (NYSE: PFE ) Pfizer 31.15 3.60% (NYSE: GE ) General Electric 25.27 3.48% (NYSE: MRK ) Merck 56.79 3.17% (NYSE: CAT ) Caterpillar 91.53 3.06% (NYSE: XOM ) ExxonMobil 92.45 2.99% (NYSE: KO ) Coca-Cola 42.22 2.89% The Average Joes of the Dow on 31 December 2014 were: PG Procter & Gamble 91.09 2.82% IBM International Business Machines 160.44 2.74% CSCO Cisco Systems 27.82 2.73% JNJ Johnson & Johnson 104.57 2.68% MSFT Microsoft 46.45 2.67% JPM JPMorgan Chase 62.58 2.56% DD DuPont 73.94 2.54% INTC Intel 36.29 2.48% BA Boeing 129.98 2.25% WMT Wal-Mart 85.88 2.24% The Results The total returns each year of the Joes vs. the Dogs is shown in the chart below: 2005 2006 2007 2008 2009 Joes 7.65% 18% 16.60% -24.81% 26.65% Dogs -3.46% 25.80% 2.10% -36.56% 17.19% 2010 2011 2012 2013 2014 Joes 16.40% 9.25% 13.19% 33.77% 11.63% Dogs 21.43% 16.85% 8.95% 28.54% 6.45% Here’s a year-by-year comparison of the Joes Vs the Dogs in an easier-to-read graphic. The true outperformance is best explained by considering how well a $10k investment in each strategy on December 31, 2004, would have fared, as shown below: Over the 10-year period, the Joes strongly outperformed the Dogs. The Dogs strategy would have nearly double your money in 10 years, turning $10,000 into $19,320 — not bad. But the Joes strategy would have performed much better, turning $10,000 into $30,320! Conclusion First of all, I want to qualify the above analysis with the observation that it is only based on 10 years of data. As such, the Joes may have had a few exceptionally good years at the start of the decade which then exaggerates out-performance in the later years of the decade. Indeed looking at the Joes cohort from 31 December 2014, one would be concerned by some of the picks: P&G has lost 14% TR YTD IBM has lost 11% TR YTD Wal-Mart has lost 28% TR YTD But despite the above, the Average Joes has only lost 3% YTD on a total return basis. The Joes has included some good performers: MSFT has gained 20% TR YTD Boeing has gained 15.5% TR YTD JPMorgan Chase has gained 10% TR YTD The Dogs have had a better 2015 so far, with just a 1% loss. I have to say it is quite comforting to know that with such big individual losers in the Joes, that the overall loss is not too bad. I know in my own portfolio that I have had big losers this year, and it is quite easy to dwell on those underperformers. When I look at my total performance, it’s actually okay — it’s breaking even — and I need to focus on the big picture.

Managing ETF Liquidity

Over the years, certain ETFs have had problems with pricing in the face of extreme market events. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. By Roger Nusbaum, AdvisorShares ETF Strategist ETF.com had a detailed post titled ” How Illiquid Are Bond ETFs, Really? ” Over the years, certain ETFs have had problems with pricing in the face of extreme market events. This first came to the fore in the fall of 2008 for fixed income funds, when the bond market didn’t function correctly for a short while (subjectively you may think a long while, as the markets for commercial paper and floating-rate preferreds were devastated). Since then, there have been a couple of other instances where ETFs “didn’t work” for a very short period. Part of the equation, as we learned in 2008, was that ETFs trade more regularly than the things they track. However, this can be true for fixed income markets, for example, but typically not for domestic equities, which is a point Dave Nadig explores in great detail in the above-linked article. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. One solution is to not invest at all, which I am not dismissive of, but the drawback there would be the need for a much higher savings rate. It has been three months since that 1000-point down open for the Dow, when a lot of these ETF issues popped up again in conjunction with investors and advisors getting whipsawed badly as stop order selected based on an inefficient open where funds traded at very wide discounts. As an “oh by the way,” if you missed it, the NYSE and Nasdaq will no longer accept stop orders. The idea that investment products have drawbacks is not a new one as far as this blog is concerned, but maybe it is correct to that the drawbacks are evolving, or we are learning more about them at least as far as ETFs are concerned. Where there is risk that ETFs may not price correctly or efficiently, it makes sense to position yourself where you are not subject to the risk, specifically being in the position where you must sell when one of these extreme market events is under way. This is not a comment about timing the market, but more like “Ok, the market just fell 8% in ten minutes, it’s probably not a good time to sell for the monthly withdrawal or rebalance.” (Assuming speculating on an extreme market event is not part of the investment strategy.) I also think this is an argument against an all-something (ETF, traditional fund, individual issue) portfolio, as opposed to having various types of products. It is also about cash management. Most advisors will tell you not put money into the stock market that you might or will need within five years, like a down payment for a house or college tuition, with the idea being that five years may not be enough time to recover from a large market decline. While keeping five years of cash on hand as part of an investment strategy in retirement is not ideal, it makes sense to stay ahead of the regular withdrawal need by a couple of months or so. That way, an intention to sell on the morning of August 24th can be pushed back to avoid participating in temporarily extreme trading. Emergency needs can also be mitigated. We talked about this before, but in addition to regular spending, there are one-off events that can be budgeted for very easily, and that do seem to come up semi-regularly. Examples of this includes new tires, vet bills (one of our dogs tore her cruciate in October), something with the house and so on. I am a fan of segregating several months of emergency funding, maybe assuming $1000/month, and all the better if not all of it gets spent, but it is another way of not selling today because you have today to pay for something. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. ETFs offer access and ease of diversification, so instead of avoiding them, understand the drawbacks, insulate against those drawbacks and use different types of products. It doesn’t really matter if an ETF traded at a 20% discount to its IIV for 40 minutes on August 24th, except to the person who sold in the middle of that because he “had to.”