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More simple trading models to use

/ 05:04 AM December 26, 2017

The “Dogs of the Dow” is one of the simplest investing systems that we can adopt and use, like I’ve said before. It involves selecting 10 of the 30 companies in the Dow Jones Industrial Average (DJIA) with the highest dividend yield at the beginning of the year. For our purpose, this would be choosing 10 from the 30 component stocks of the Philippine Stock Exchange index (PSEi).

Modifying the timing of entry and exit, and position-sizing (the amount invested in each of the stocks selected), my friend ended his trading foray for the year way above the market’s average rate of return of about 23 percent.

His holdings in the property and holding firm counters paid off the most. He made a huge capital gain (profit made from the difference of his buying and selling prices) of 62.01 percent in Megaworld Corp. (MEG), 33.7 percent in SM Prime Holdings Inc. (SMPH), 31.34 percent in Ayala Land Inc. (ALI), 44.87 percent in SM Investments Corp., 28.53 percent in Ayala Corp. (AC), 27.29 percent in Alliance Global Group Inc. (AGI).

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My friend is now rebalancing his investment portfolio. He is thinking of simplifying further his investing strategy by reducing the number of his stocks for next year. One model he is looking at is the “Dow 5.”

The “Dow 5” involves selecting the 10 highest dividend-yielding stocks like what is done in the “Dogs of the Dow.” Out of the 10 stocks that stand out, the five with the lowest market price is, however, selected. This selection of stocks is also known as the “Small Dogs of the Dow.”

In its original concept, invest an equal amount of money in each of the five stocks selected. Hold them for a year and repeat the process the next year.

Another variation is the “Dow 4.” The selection of stocks will also come from the top 10 stocks with the highest dividend yields. Instead of picking up five stocks as in the “Dow 5,” pick up only four stocks with the highest market price.

A simple but purportedly to have outperformed the “Dogs of the Dow” investing strategy and its variations is the “Foolish 4,” made famous by Motley fool.

Motley Fool “is a multi-media financial services company that provides financial advice to investors through various stock, investing and personal finance services.”

The “Foolish 4” model chose the same four stocks of the “Dow 4.” Instead of placing an equal amount of money in the four stocks of the “Dow 4,” you “allocate 40 percent of the portfolio to the lowest-priced stock and 20 percent each to the other three stocks.”

Take note, the basic “Foolish 4” method starts with the list of the 10 highest dividend-yielding stock of the DJIA. These 10 stocks are ranked by market price—from lowest to the highest.

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As a general rule, “if the lowest priced stock is also the highest yielding stock, it is dropped from the list.” This rule is imposed because of the many observations made in the past that a stock with both the lowest market price at the same time has the highest yield, its performance for the coming year has always been “pretty grim.”

What is then considered as the stock with the lowest price and allocated 40 percent of the investment fund in the “Foolish 4” model is actually “the second lowest priced” stock of the top 10 stocks in the “Dogs of the Dow.”
A supposedly more successful investing model developed by the Motley Fool is the “Foolish Four-RP Variation.” The method is said to have beaten the “Foolish 4” model “fairly frequently over the last 25 years.” Its strategy is to “look for likely turnaround stocks” and “uses a ratio procedure to combine the effects of low price and high yield.”

The formula is to “divide the yield by the square root of the price.” You can also square the yield and divide by the price, as an alternative way.

The numbers will be different but the stocks will be ranked in the same order— from highest to the lowest. Eliminate the stock with the highest ratio. Then buy the next four stocks, assigning equal amount of investment.

Bottom Line spin

Data in the US using various starting times for the above simple models have shown that “portfolios that started in December or January significantly outperformed other starting lines.” With this observation, there is this recommendation which says that you should “enter the market starting the last half of December or no later than first week of January.”

There is really no perfect investing formula. My friend waited until the end of March before making his move to enter the market. He made his exit not later than the second week of November and ended with a very comfortable rate of return.

Lastly, as proven by my friend, a simple investing strategy would do to win your game in the market. But he attributed his success to what Abraham Lincoln pointed out when confronted with the enterprise of chopping a tree: “Give me six hours to chop down a tree, and I will spend the first four sharpening the ax.”

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