Wednesday, November 05, 1997
by Robert Sheard
LEXINGTON, KY. (Nov. 5, 1997) -- One of the issues that we regularly create a din about in the Motley Fool is the traditional Wall Street money manager's inability to Beat the Dow (or the S&P 500, or whatever benchmark they use). As you may recall, in a survey I did early this year 82% of all the stock mutual funds in business for a full decade failed to keep pace with the industry standard S&P 500 Index.
But looking at the performances of just the thirty Dow stocks over the last three, five, and ten years, it's evident that Beating the Dow shouldn't be all that difficult if you're not bound by all the institutional madness that fund managers deal with.
For example, over the last three years (end of third quarter 1994 to end of third quarter 1997), the Dow Jones Industrial Average has achieved an annualized return of 23.95%. By all accounts, this is a wonderful record. Yet if you look at the returns for the individual components in the Dow today (I realize some changes occurred in the index in March, but the general point remains valid), 21 of the 30 individual stocks posted a better gain for the same three-year period. Only nine Dow stocks actually "lost to the Dow."
Over the last five years, the DJIA returned 15.85% a year. Yet 24 of the 30 stocks posted better returns had you simply bought and held them the whole five years. And over the last ten years, the Dow posted gains of 11.57%, a standard that 21 of the stocks bettered.
In other words, in all three periods, over two-thirds of the Dow components actually performed better than the overall index. The only real trick to Beating the Dow, then, is to try and avoid the one-third of the stocks that drag the index down. When you look at it that way, the task doesn't sound nearly as onerous as the efficient-market, random-walk crowd would have us believe. Even a dartboard method using the Dow components would put the odds in your favor two-to-one.
What's the point? Don't get too wrapped up in the seemingly endless permutations of our favored Dow Dividend Approaches. For more than seven decades, we know that buying the highest yielders on the Dow has put one ahead of the game. Enjoy that advantage over fund managers, pick whatever variation you feel comfortable with and spend the extra time making the most out of life instead of sweating over your investment decisions. Fool on!
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T -1 5/16 48.06 GM + 1/16 66.69 CHV -1 7/16 84.75 MMM + 1/8 93.00
Day Month Year FOOL-4 -1.35% 0.81% 20.51% DJIA +0.04% 3.37% 19.30% S&P 500 +0.21% 3.08% 27.27% NASDAQ +0.38% 2.74% 26.82% Rec'd # Security In At Now Change 1/2/97 153 Chevron 65.00 84.75 30.38% 1/2/97 179 Gen. Motor 55.75 66.69 19.62% 1/2/97 479 AT&T 41.75 48.06 15.12% 1/2/97 120 3M 83.00 93.00 12.05% Rec'd # Security In At Value Change 1/2/97 479 AT&T 19998.25 23021.94 $3023.69 1/2/97 153 Chevron 9945.00 12966.75 $3021.75 1/2/97 179 Gen. Motor 9979.25 11937.06 $1957.81 1/2/97 120 3M 9960.00 11160.00 $1200.00 CASH $1167.51 TOTAL $60253.26