Theory of the Dog

In the beginning…

In kicking off this blog, I referred to the abysmal long-term performance of the big name mutual funds, my desire to improve on their numbers and my intent to show the way to others. Well, long before I recognised the stupidity of trusting “smart money”, I came across a reference to Dogs of the Dow. Dogs of the Dow is a stock-picking strategy in which one buys the top 10 best yielding companies in the Dow Jones Industrial 30, in equal number, and re-balances annually. The theory being, that the DJIA components are already 30 of the best and most stable organisations in the US, and that the yield, that is the dividend divided by the current stock price, is a reflection of the popularity of the organisation. A higher yield means a lower stock price, hence the reference to popularity and the status of “Dog”. Further it was thought that today’s Dog is tomorrow’s darling, i.e. the stock goes up and you make money.

Books were written, newsletters focused on this strategy and the media caught on.

Still young and stupid, I thought “what could go wrong?” and (before considering the safety of the model portfolio) jumped in with real money. I didn’t have a lot, so I bought one company. AT&T. Sure enough, to compound my ignorance, AT&T truly doubled within 12 months. “This is a winner!” And I re-balanced and added more money.

Of the the three stocks subsequently selected I only remember Goodyear Tire; not long after my purchase the wise men that oversee the DJIA composition decided that Goodyear was no longer representative of the new economy, so they were out. The stock tanked. Lesson learned. (I should add “Lesson learned” as a tag).

Learning from Models

Fast-forward a couple of years and the topic of Dogs peaked my interest again. My portfolio was average, which is to say that ⅓ sucked, ⅓ went nowhere fast and ⅓ was doing all the heavy lifting, and I was looking for something to move me ahead. Having been stung once by changes to the DJIA, I turned my attention to, what was at that time, the TSX100. Surely what applied to the Dow, should apply to 100 of Canada’s largest institutions.

I built my model portfolio in Quicken and resolved to manage it as if it were real money: collect dividends, re-balance annually and re-investing the dividends in the process.

Consider my timing, building a portfolio of stable, dividend-paying value companies against the following backdrop:
  • it is 1997 and the tech boom starting to build
  • momentum investing was considered a valid investment methodology
  • the tech boom was driving interest in growth investment
  • value investment was seen as passé (if you are paying dividends, you are out of ideas with respect to investing in your business)
  • the dot-bomb was just around the corner (see my post about the “4 Horsemen of the Internet”)
By 2002, 5 years on, this little model portfolio had racked up a total gain of 98% and it had done so with no regard for the market overall, with disregard for the individual components, adhering only the following rules:
  • choose 5 of the top six yielding companies on the TSX100 (the very top yielding company may be tainted – safety first)
  • split your investment dollars across those five as equally as possible
  • re-balance yearly, on the anniversary date (or very close to it), re-investing all dividends
  • rinse, repeat

In future posts, I will outline how the portfolio evolved, with real money, over time; back then, as luck would have it circumstances “forced” my hand; I needed to deploy some cash in my RRSP and to ignore my portfolio performance seemed a mistake that even I could not make.

3 thoughts on “Theory of the Dog

  1. Pingback: “What to do??” | Day Early, Dollar Short

  2. Pingback: 2013 Portfolio Update – May 6, 2014 | Day Early, Dollar Short

  3. Pingback: My Personal 5-Bagger | Day Early, Dollar Short

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