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Stock Selection Method: Does This Method Really Work?




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This article is from the How to Start an Investment Program tutorial, author unknown.

Stock Selection Method: Does This Method Really Work?

The theory behind this method is that the ten "dog" stocks are currently out of favor, but will rebound in the coming year. The evidence for using this technique is in the compounded returns for the last 25 years- 16.85%! This beats all but a few professional fund managers at their own game, and something you can do yourself without paying for any of their so called expertise.

There are variations of the Dow Dog theory that work as well as or better than the theory described above. One variation popularized by Michael O'Higgins in his book, Beating the Dow, recommends selecting the five least expensive stocks from the list of the ten highest yielders (the dogs). In choosing stocks in this way, you will need to know the prices of the Dow stocks in addition to their yield. Using this technique has produced a whopping compounded annual rate of 19.17% for the past 25 years. Not too shabby!

Selecting a portfolio of stocks using one of the methods described above may sound intimidating when you first read the instructions. I bet I reread them five times before I felt ready to cement my first crown. Now the entire process is second nature. So will investing by selecting among the Dow dogs. By spending just a few minutes a year to do some basic research, you can have a methodology that has a history of beating the Index Funds. If you have questions, such as confirming the stock price or yield of a Dow stock, this is where your broker or advisor can be useful. That's what you pay them for.

With this section, and the ones on Index Funds and Mutual Funds, you have been given suggestions on how to set up an investment portfolio that can compete with and beat most fund managers. The amount of time you want to spend and your amount of interest will determine which plan is most suitable for your needs. Hopefully you will recognize that, regardless of the method you choose, the stock market is the best long term investment vehicle around.

 

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