I have a new board that follows a broader contrarian philosophy than just Dow underdogs:

please visit:

http://www.investorshub.com/boards/board.asp?board_id=2923

I try to update the portfolio selections every couple of weeks. Things can change quickly. For example, if I were to update the portfolio today, GM would not be among the underdogs, it has rebounded sharply since becoming our top ranked stock. If you wanted to make a purchase today using this strategy, go to www.dowunderdogs.com, write down the top ten stocks as shown in the 2004 closing ratio tab. Then go to Yahoo Finance and find the lowest 5 p/e ratios among those ten stocks. They constitute our 5 Dow Underdogs.

Which also shows why it make sense to use this as a mechanical system. I did not add GM to my portfolio as I still am pessimistic about it's future. On the other hand, it has outperformed the underdog stocks I did buy.

>>Generally, what we want to buy are the stocks that everyone has recognized as having a poor future, ....<<

Yup. But I don't think "everyone" recognizes GM's poor prospects. Yet. I wouldn't short a breakaway gap through the 50dma and downtrend. Needs more happiness. But not a buy.

The crowd is always wrong at turning points, but the rest of the time - most of the time - the crowd is right, making a trend.

Robert :)

roberta, one of the big reasons I'm sour on GM is the fact that so many car owners are upside down on their car loans. That fact coupled with the prospect of higher rates, suggest that they face some lean years ahead. That said, I also agree with RSSCOTTIE, that, that is as much a reason to buy as to sell. Generally, what we want to buy are the stocks that everyone has recognized as having a poor future, while avoiding those that everyone has recognized as having a bright future.
For now, I've just decided to let my judgment overrule my system, I'll keep an eye on GM, but I suspect that there are still a lot of selling ahead. I think my ideal entry point will be at a time when sales and earnings have fallen off a cliff. Analysts will greatly lower earnings projections and the stock will really tank. But note, that the time to buy will usually be a time when the future looks terrible.

In this case, your judgement might work to your advantage.

GM is being priced like a consumer finance company near the end of an interest rate cycle. Low expectations are probably justified and this is reflected in the pe/yield.

Their report today shows the auto manufacturing business is soft. No reason to think that will improve soon, despite guidance higher.

Scottie, you are absolutely correct in your comments. However, there have been some real stinkers in the past among the Dow underdogs. GM may do well in the future. My point is that I'm second guessing the system here because I think GM's future is indeed negative. At some point, however, I might become interested in buying GM. Probably, after the dividend is cut, and the price is taken much lower. I did acquire a little bit of EK when I first started the strategy even though I had some similar concerns. It has not done poorly but is a loser. Since being booted out of Dow it has been, of course, sold heavily. I think it's prospects over the next few years is better than GM so I'm still holding it.
I believe the idea here, is to try and identify when a stock has been so unloved that it has been oversold and is a bargain. Some stocks that seem oversold, are not yet bargains, or may never be- a la Bethlehem Steel. If GM bounce back and I think it's probable, long term buyers here might be rewarded. I think a better buying point will be reached later. Whatever, it's a sure bet that by the time, it's obvious that GM is doing well, the price will have already rallied strongly. In any event, GM has the lowest p/e of the ten worst performing Dow stocks, so it is our top rated stock. While I'm personally overriding the system now, it's my intention to use this as a mechanical strategy, I don't expect to override it often with judgment calls.

GM has a low PE ratio because people expect it to have a negative growth rate. The point of Underdogs is to take our emotions out. Another thought is that prices are moved to extremes because of emotional over-reaction. Therefore one should buy when prices are low. I bet it performs.

I vividly remember in the 70's when GM was going out of business because of the more economical and better-built Japanese cars.

Just my $0.03 (inflation)

Scott

I updated our Dow underdog portfolio, the weekend. The #1 rated Forlorn Five stock is General Motors because of it's single digit p/e. While this strategy (at least the underperformance part of the strategy, low p/e has been the focus of other long term studies) has a 70+ year track record as an automatic strategy. That said, I have not bought GM and probably will not add it in the future unless the price just drops to a very compelling point. It has a good yield now, a very low p/e. But it's growth prospects may be negative. While this board is seeking contrarian plays, I'm not sure this is a good contrarian play. I'd welcome any of your thoughts on this.
With my track record, GM will probably double this year!

Good morning, I've updated the Forlorn five and the Fab Five stocks. An interesting paired stock strategy is to go long MRK and short PFE. I am considering buying puts on PFE as I don't short stocks in my IRAs.

Good day for JNJ and MRK. My calls on JNJ made today my best day in quite a while, perhaps April can finish in the black yet.
T and SBC are still lagging. GE sold off today.

Sorry, for the neglect of this board. I have been busy, have enjoyed having my daughter visit. In thinking about what I hope to accomplish here, I realize that I have probably been too ambitious. I will probably not try to benchmark a portfolio as such due to a number of practical constraints and the realization that such benchmarking provides little practical information. Carlson's book details 70 years of performance of his strategy, but contains some long stretches when the strategy underperformed the markets.
I'm still trying to compare O'Shaughnessy's findings that poor stock performance in the previous year was the worst strategy he investigated, with Carlson's findings that it was one of the best. Virtually all research indicates that low P/E stocks outperform the market. Thus we have added that qualifier to Carlson's under performance criteria to develop our own Dow Underdogs.
I still hold T in my portfolio and will continue to do so, even though it's no longer part of the Dow. My guess is that, it will outperform the Dow over the next year. I also hold EK but will re-evaluate it. On the surface, there is little reason to hold it, but then that may be the best reason reason to hold it! (pure contrarianism).

Thanks, Hier, I'll be checking this thread. I'm quite sure there will be opportunities in HON givin the $billions that are in Dogs funds. There are traunches of these that rebalance throughout the year. Hard to know when though. Buying HON on dips the next several months should work out.

The Dogs of the Dow refers to a strategy of picking the highest dividend yielding Dow stocks. Here, I'm following a Dow underdogs strategy looking at the worst performing Dow stocks with the lowest P/E s. We will replace T with another telephone stock, SBC. Contrary to the I-Box info, we will probably continue to carry T for another year. Several reasons, that's how Carlson conducted his study. The initial move out of stocks being dropped and into stocks being added will probably allow us to pick up a little more contrarian gain.
Because so many funds will have to own the new dow stocks and sell the old, that if I wasn't able to switch immediately on the news, I might wait till the dust settles in a few months. This might even be a good time to pick up more shares of the stocks being dropped, particularly T and IP, if shares get really slammed between now and April 8th.

How will the reshuffle affect the " Dogs of the Dow" strategy?. As T drops out, HON will move in to the list. Will the "Dogs" funds move into HON on April 8th? Or wait till next Jan 1.

New Dow stocks will be AIG, PFE, and VZ. So more financial, drug, and telephone stocks. Certainly doesn't help diversify the Dow further. I'm not sure I understand how VZ adds anything SBC doesn't , or PFE is needed with MRK and JNJ already in. Seems like a number of other unrepresented sectors would have had a candidate. Certainly it's telling about our economy, that no industrial manufacturers were selected.

The Dow is being shaken up again. Effective April 8th, T, EK, and IP will be dropped from the Dow. Replacements have not yet been named. I will continue to hold T and EK for now, don't own IP. None of these stocks are growth stories, would guess that the Dow will add more growth oriented stocks. Note that some stocks dropped from the Dow have done very well. One example was IBM, which I believe actually outperformed the Dow after being dropped. Natch, they were put back into the Dow. Had they been left in, the Dow would be higher than it's present levels.

Browsed through John O'Shaugnessy's book, "What Works on Wall Street" at the bookstore. Kind of shocking. He had reviewed data for 40 years (vs Carlson's 70 years, so a lot of overlap) and found that the 'worst' strategy was to buy last year's losers. Carlson's data is in an appendix at the back of his book, don't believe it's so for O'Shaugnessy's. Will try to pick up the book at the library to figure out why the difference, any ideas? It would seem that one of the authors is in error.
Otherwise, O'Shaughnessy finds as others have, that low price/earnings, price/cash flow, price/book stocks, tend to outperform the market averages.

Scottie, that is basically the theme of this board. If we are to buy low and sell high, we need some confidence that by buying at ever lower levels, that we aren't just throwing good money after bad. These stocks have a certain critical mass that almost assures they will bounce back somewhat. Some of these companies may eventually go the way of the dinosaurs, but that will take a long time, and we will have been vacated the premises. The screens I do: 1) large market cap, 2) low p/e, (3) underperformance as compared to the 200 day moving average vs broad market and (4) low debt/equity ratios. Stocks passing all of these screens should be good candidates for AIMing, albeit , you won't make a killing off their volatility normally. You could certainly add other screens as well, such as high dividend yield, low price/book, low price/cash flow, etc.
I'm currently unemployed, planning on re-entering the workforce at least part-time next month. Safety is very important to me at the moment, as this is my sole means of support. Should I free up some shekels, I probably will look to LD-AIM some spicier fare.

RE: GE and quality. One of the reasons the Dogs of the Dow works is that the companies involved are quality companies. AIM_Hier commented on GE's long term quality and I think that is very important.

In one of my prior lives I was in a head hunter company in Atlanta. One of the things that struck me was how we would not even consider sending borderline candidates to companies such as Coca Cola. They would only look at people with certain success profiles: matching theirs. Hence the companies would be constant in their future approach and therefore hopefully continue to be successful.

The bottom line is DJIA type companies have a culture of success that is not so affected by fads. They will probably continue to succeed in the future. The downs in their stock prices should be temporary, making them good candidates for this approach.

Thus what appears to be a statistic truth also has a logical explanation.

Scott

Diversification is preached by most though not all gurus. Note that in our forlorn five, two of the five stocks (40%) are drug companies, JNJ and MRK. Thus, one might choose to select one or the other and select another Dow dog. I plan to soon to add a global underdog listing for more diversification options.
I've chosen to include both JNJ and MRK in my portfolio.

Scottie, no I don't watch CNBC anymore. Too distracting! Plus I don't want to be confused with all of the conflicting talking heads. I'm trying to develop a discipline in my trading. Furthermore, I'm simplifying things. I could spend a week (if my trading profits ever so allow!) on the Riviera and not miss a beat.

GE is a market leader in many business sectors. It is just inconceivable that they would fall off in all of them overnight. Furthermore, they are very strong financially. Perhaps, in time they will lose their place as a blue chip. But that day, if ever, is a long way off, and in the interim, there would be lots of volatility. Thus, I love this kind of stock in an AIM program. I'll buy at lower and lower prices, and still sleep soundly at night.

Hope you are right! Did you see the Pres of GE on CNBC yesterday morning? I was impressed with his positivism, not to mention his confidence that they were competing well in many markets in many parts of the world.
Scott

MRK,GE, and JNJ are obviously out of favor right now. Daily drubbings of these stocks. However, they appear to be cheap relative to the broad market. Furthermore they are unusually strong financially. Expect to make money on these kinds of stocks in the next year or two. Their time will come, and there will be a season to sell them.

Darvas, thank you. I was using that as an example of one of the few momentum players to have an exit strategy. I agree wholeheartedly that Dogs or AIM will make money with no luck or interpretation of the market involved.

You are thinking about Nicholas Darvas. I have his book, of course, it is essentially the reverse of AIM. It just shows there is more than one way to skin a cat. You can buy the laggards a la AIM, or buy the leaders a la Darvas. But you need a disciplined reasoned plan to execute either strategy.
If one is to be a long term success in the market, he needs a well established comprehensive trading strategy. He needs to follow that strategy with patience and discipline. If this is too restrictive, he should set aside a small amount of money, with which he trades as he sees fit, outside of his trading strategy.
If you can follow the AIM program for something like the Dow Underdogs strategy (large cap value plays), I don't see how you could fail long term, if you don't deviate from your strategy.

The real problem as I see it is that most of the emotional methods seem to get us into momentum plays and have no method of getting out. Dogs and AIM both have exit methods. But the adjustments we make seem to reflect our view of the markets future and that is always a short term view.

Can't remember his name, but the only momentum player I ever heard of with a rational get out method was the dancer in the 50's (How I Made a Million.....) He just stopped out of things. But he was in a bull market.

Yes, you're right Scottie, the tinkering is a problem. For most of us, our emotions, our gut, hurt our trading success. That is the reason, formulas such as Dogs of the Dow, my Dow Underdogs, Lichello's automatic investing, can enhance our investment performance. ....That is they can enhance it, if they are followed. That is the rub. Most of us can't help but interfere with the system. That interference pays off at times, but for most of us, it usually backfires.
The other problem is confidence. It's hard to be confident if our mechanical system exposes us to a series of losses. We start to worry that it no longer works. I like to think I'm about 80% complete towards perfecting a mechanical system that I will be following religiously.
I've begun a trade journal that I think will help in this regard. I'm recording my thoughts and why I do certain things, particularly if I'm overriding a system.
Investing shouldn't require a mensa IQ. After all, the market has a strong long term upward bias. If you simply plunked all of your money in DIA or SPY and never made another change, I suspect that in the next 10 years, you will have outperformed 80% of all money managers. If you add to that, strategies, that have proved their worth over the last 70 years such as the Dow Underdogs, why tinker once you find a strategy that meets your personality and temperament?

Maybe the problem with such cut and dry techniques as Dogs is that we humans like to tinker. As soon as we adjust, we are no longer doing Dogs of the Dow.

Hi Scottie. I'm organizationally challenged. That's something I'm working on this morning, as a matter of fact. My bookkeeping chores are greatly simplified now that I trade in tax deferred accounts exclusively. I have no taxable brokerage accounts so the tax returns have been greatly simplified.
Thanks for reminding me of Stein's book. If you look at page 14, you will see him cite several studies showing mean reversion with regard to prices and later there is a chapter on mean reversion with regard to earnings. Both of those are incorporated in my model. Stein advocated buying index ETFs or mutual funds rather than individual stocks. There are several useful ideas in the book that can be applied to individual stock selection and portfolio management.

I started a small standard AIM program in GE on 8/15/01 and had buys on 9/18/01, 6/14/02, 7/1/02, 9/27/02, 10/7/02.

For reasons relating to my broker being bought out, I closed the position on 1/5/04 (31.25). I am pretty sure I should have had a sell shortly after that. I then re-established the whole position yesterday at 29.50 which was a precalculated AIM level.

My book keeping and management techniques are getting more involved (can't say sophistocated); however, I intend currently to use a BUY SAFE of 10 and sell of 8%. I also intend to round lots to 100 on buys (properly adjusting PC) and just sell odd lots.

In addition to Dogs, I keep thinking about Ben Stein. YesYouCanTimeTheMarket.com and his book of the same name.
Scott

Some advantages of Dow stocks: Dow stocks are closely watched by a number of analysts and institutions. The opportunities for financial chicanery are greatly reduced. The companies have tremendous financial staying power. Setbacks that would bankrupt lesser companies can be withstood. Many Dow stocks, like GE, resemble mutual funds, in that they manage portfolios of companies, constantly adding and selling companies. Many are widely diversified. For example, currently JNJ is depressed as are all the pharmaceutical firms. However, JNJ has a substantial presence in non-pharmaceutical consumer products.
Our Dow underdog portfolio is a high yield portfolio. While you are holding these stocks, waiting for the market to rebound, you are actually earning more than you would have, if you parked your money at the bank.

Scottie, what buy and resistance levels do you use? One of the things I don't like about conventional AIM is that with a 10% safe and 10% order limit, a stock could go up just less than 20% and then plunge to just less than 20% below your purchase price, and you get no trade orders. If the price then recovers to it's original level, you've been on a rollercoaster and you're no better off than a buy and holder. With stocks like GE, you just don't get the volatility you get with some of the tech stocks. On the other hand, if you're using some of O'Shaughessy's technigues, you might be spared the trauma of deep divers.
I would not be using a very large cash reserve for an AIM of these kinds of stocks. If you get a chance, read Carlson's book. In some bear markets, this strategy made money by itself.

Been AIMing GE for a while. Barely got a sell during the runup.
I like the "Dogs" concept. O'Shaughnessy also advocates it.
Scott

Added GE to my portfolio today. GE has always been regarded by me as an expensive stock, great company. The stock is getting cheaper relative to the rest of the DOW. Stock is hammered today, so I added some even though it looks like this bear market may have a lot of room to run to the downside. With GE, you are almost buying a mutual fund, as the company is involved with so many businesses and sectors.

John, I would think these stocks will on average do well. However, there could be some clunkers also. We are seeking here to select stocks that are not only out of favor, but with a strong probability of eventually rebounding. Thus concentrating on Dow stocks. Using the MSN screener, I did a screen of a portfolio I thought might fare well, looking for weak stock performance past year, low p/e, low debt/equity, large market cap. Looking at top 25 picks, several of our Dow underdogs were on the list, as well as some foreign stocks available as ADRs. This is an approach I will be looking at further with a view to allowing more diversification than the Dow by itself provides.
That said, I still believe the Dow Underdogs can be a useful portfolio component for anyone. They should work well with AIM as well.

Charlie

>> So one would just need to find a way to find out what stocks were deleted from the QQQ

Just keep an alert in Yahoo Finance for the words nasdaq and re-ranking and you should be able to find it. Also, the www.nadsaq.com site had the info too.

I purchased CIEN after I read the article and I've already had two sales, but the stock has dive bombed in the last couple of weeks, just 1/2 point off a buy signal now, but so far so good, I'm happy with the results.

I also created a clearstation.com portfolio of all the stocks, and only Ericson and Broadcom are 'up' for the year.

John

Hi Aim Hier, here is a URL link that will bring up the UnderDog screen in the MSN stock screener.
http://moneycentral.msn.com/investor/invsub/finder/finderx.asp?Query=SV1QS2F92Z06S2F9999ZF4Z00F107Z0...

If you have never used the stock screener before, you should be sent to a page to install it. After installing it just click on this link again. In the middle of the page you will see the stock screen. here are the rows top to bottom.

 
 1. Dow Jones Membership              ask me     you select which Dow Jones you want. 
 2. Previous Day's Closing Price      display 
 3. % Price Change Last Year          low as possible 
 4. Previous Day's Closing Price/200-Day Moving Average display  
 5.52-Week High-Previous Day's Closing Price)/(52-Week High-52-Week Low)*-100          display 
 6. 5-Year High Price-Previous Day's Closing Price)/(5-Year High Price-5-Year Low Price)*-100    display 
 7. Current Dividend Yield       display 
 8. Previous Day's Closing Price-52-Week Low)/52-Week Low*100   display 
 9. Previous Day's Closing Price-5-Year Low Price)/5-Year Low Price*100  display 

LC, yes I read several books regarding the "Dogs of the Dow" approach. Recent Dow changes have, in my opinion, lessened the effectiveness of that technique. The problem is that some stocks historically pay out a substantial portion of their earnings in dividends. Others pay out only nominal dividends or none. Thus the Dogs of the Dow tends to pick from a subset of the Dow. The Dow Underdogs selects from the whole universe of Dow stocks, even if they pay little or no dividends.
If the 200 day moving average is declining, that's great, we are selecting the 10 stocks lowest relative to their 200 day moving averge. We are holding those stocks for one year. So it doesn't matter that the average is going to eventually flatten and even one day rise. We will always have ten stocks to select whether the averages are rising, falling, or are flat. If you read Carlson's book, you will see that this has been tested as far back as 1931. This strategy doesn't work every year, but over longer periods, has had an incredible record.
As I posted in the I-Box, I am interested in using technical analysis (Williams %R is one such technique) that might help improve entries and exits even more than the basic Dow Underdog criteria.

Ok Aim Hier, that makes some since to me. But that may not be the best time to get in the stock. The stock could drop and stay down, you would at first get a large difference, and then as the 200 day MA dropped the difference would become less and less.

Have you checked out the Dogs of the Dow theory? http://www.dogsofthedow.com/ It is a similar theory, it comes up with a lot of the same stocks that Dow Underdogs do.

Also check out (long term William %R). Using the stock sreener on MSN I could make a screen for it. I can use ether the five year high/low or the 52 week high/low for the test.

John,
So one would just need to find a way to find out what stocks were deleted from the QQQ. Possibly putting them through a valuation formula. I think it's an interesting idea. Potentially could return very high returns, but with more risk. The QQQ stocks are not the same time-tested quality of the Dow stocks. On the other hand, you are not likely to get a ten bagger with Dow stocks, but you just might with the QQQ stocks.

Hi LC. We are simply looking for underperformance. The 200 day moving average provides a kind of equilibrium price. By focusing on those stocks most below that average, we are targeting the most out-of-favor stocks. In the book, Carlson's research indicated that stocks selected by this approach did even better than those selected by just looking at price change from one year earlier. In the I-Box calculation, we look for stocks that are among the ten lowest by each calculation. That's why we have only six stocks selected and not ten.
Numerous studies have concluded that low p/e stocks outperform, so we go one step further than the book and rank the stocks by p/e. I'm working on a model portfolio that we will track here and it will probably just use the 200 ma approach to select 10 stocks, then will place in the portfolio, the 5 with the lowest PEs.
This is also, frequently, a high yielding portfolio. It is not really a growth portfolio, these are large financially strong companies that are mature. We hope to achieve a growth portfolio kind of return, however, with less risk.

Thanks for the info...

What the article was saying is that the QQQ is rebalanced based on Capitalization for the timeframe given, and that the ones taken out are ususally at the bottom (i.e. can only go up), and the ones that are added are at the top( i.e. can only go down, or little more up), so you end up with new additions not doing as well as the ones removed. Very cool article, I just wish I had access to WSJOnline.com .

John

Hi Aim Hier, could you expand on what the price to 200 day MA ratio does for you, What are you looking for?

Thanks for stopping by Tom. Your perverse investment candidates do have an important advantage over the Dow Dogs, that is a larger universe of stocks to select from. Presently, my concept would probably be invested in only 3-5 stocks at any one time. On the other hand, these are such large financially strong companies, that the likelihood of their rebounding make them ideal AIM candidates, in my opinion (and hopefully!). I plan to set up an actual account to trade this idea, so I can benchmark it's performance to the Dow and S&P 500. I haven't completely formulated all of the rules, however. I'm thinking I'd like to jigger it so it's always in five stocks for risk management purposes.

Hi AH, This strategy looks a bit familiar in that it follows the idea we started with the PIC List. That stands for "Perverse Investment Candidates." It was perverse in that we were picking stocks that were ranked as "worst" in Value Line for the year ahead. The PIC list stocks were also listed on V/L's "Highest Growth Stocks" list. So we were picking from the 100 highest growth stocks in Value Line and then picking those that were the most out of favor at that time. This seems to have provided a bit of "value" to the selection process. Well, so far the PIC list has been doing quite well compared to many indexes.

So, with your 10 worst of 30 idea it seems a similar type of approach.

Thanks for starting this thread. I'll be interested in seeing how the study goes along over time.

Best regards, Tom
PS: PIC list
http://www.investorshub.com/boards/board.asp?board_id=1010

John, congrats on being our first visitor. Hope you'll come back and contribute often. Interesting point about the NASDAQ 100, I will have to check out their construction. I think there is a lot of value to be had in these kinds of analyses. It's simply human nature that we overshoot or undershoot on stock prices. If everyone believes that Procter & Gamble has better future prospects than Eastman Kodak does, it's a lead pipe certainty that P&G is going to wind up overvalued and EK undervalued.

Nasdaq dogs?

WSJ has an article about how when the Nasdaq recalc's it's top 100, the one that leave the index usually do about 41% vs. the new ones that do around 20%(something like that).

Similar to Dow Dogs.

John

Welcome to the Dow Underdogs Board. Let's exchange our ideas for all varieties of mean reversion strategies.

This board is now moved, per your request to Free Zone.