Post of the Day
July 15, 1998

From our
Dow Dividend Approach / Foolish 4 Folder

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.

Go To: Post - Folder

Subject: SIG4 - a better strategy
Author: Rayvt

Here is the new DDA strategy I found which seems to be arguably the best one. I orginally did not plan to publish this strategy, but have now changed my mind.

I call it "1sigma-4" or "sig4" for short. As always, the trailing "4" is the number of stocks you buy. This screen popped into my mind after I read YAIB (Yet Another Investment Book) which discussed selecting stocks that fell to the right of the 1st standard deviation of whatever characteristic you were screening for.

Here are the steps:

1) Compute the mean and standard deviation of the yield for the 30 DJIA stocks. (Hard to do by hand! Better use a spreadsheet.)

2) Sort the stocks by yield (high to low).

3) Discard all the stocks which have a yield lower than mean+stdev (i.e., all the stocks whose yield is below the one sigma point).

4) Sort the remaining stocks by price (low to high).

5) If there are more than 4 stocks, discard all after #4.

6) Buy equal dollar amounts of the remaining stocks. This is usually four stocks, but occasionally there are only three. Only once in 1965-1998 was there only 2 stocks. There were never any quarters where there was zero or one stock.

7) Update as usual, every 12 or 18 months.

8) [optional] Read my recent post about why the statistics for rolling periods is what you should base strategy comparisons on.

On average, sig4 gives about 1% higher return than the next-best 4-stock strategy, and a slightly better Sharpe ratio. UV2 has a slightly better average return, but a lower Sharpe ratio.

Regards,
Ray

```----------------------
(Using TimberFool's quarterly Dow data, 1965-1998)

All rolling 6-qtr periods
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   10.9%  13.4%  15.9%  13.8%  14.4%  13.8%  14.5%  15.2%  15.6%
CAGR-Avg   11.1%  14.5%  16.5%  14.4%  15.3%  15.5%  15.4%  15.5%  16.2%
Yrs gained   104    105    102    106    104    107    108    111    112
Yrs lost      23     22     25     21     23     20     19     16     15
Std Dev    13.1%  16.8%  21.4%  16.9%  17.9%  15.9%  15.8%  15.8%  15.9%
Sharpe Rt    38     52     54     52     55     62     61     62     65

All rolling 4-qtr periods
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   12.7%  15.3%  18.3%  16.3%  16.6%  16.1%  17.5%  16.8%  17.2%
CAGR-Avg   11.4%  14.0%  17.0%  14.3%  15.3%  15.5%  15.2%  15.4%  16.5%
Yrs gained   101    100    105    102    105    107    104    100    104
Yrs lost      28     29     24     27     24     22     25     29     25
Std Dev    16.8%  20.2%  24.6%  19.7%  20.7%  18.9%  19.4%  19.7%  19.3%
Sharpe Rt    34     43     51     46     49     54     51     51     57

Qtr1/Hold4
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   12.5%  18.1%  19.6%  18.8%  21.7%  18.5%  20.0%  20.8%  17.2%
CAGR-Avg   11.5%  16.3%  20.9%  18.3%  19.3%  17.9%  19.7%  17.5%  17.4%
Yrs gained    26     26     29     28     28     29     28     25     26
Yrs lost       7      7      4      5      5      4      5      8      7
Std Dev    16.5%  22.4%  27.3%  21.6%  23.0%  19.9%  20.7%  21.7%  22.9%
Sharpe Rt    35     50     60     60     62     63     71     57     54

Qtr2/Hold4
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   12.8%  15.1%  12.4%  15.8%  13.4%  15.8%  15.3%  16.5%  19.2%
CAGR-Avg   11.0%  13.7%  14.6%  13.4%  14.0%  14.8%  13.6%  15.3%  18.0%
Yrs gained    26     24     24     24     24     25     25     25     26
Yrs lost       6      8      8      8      8      7      7      7      6
Std Dev    14.7%  18.4%  21.0%  17.1%  17.3%  16.9%  18.8%  18.9%  17.6%
Sharpe Rt    35     44     45     45     48     54     43     52     69

Qtr3/Hold4
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   12.7%  13.3%  14.8%  10.5%  11.3%  11.8%  11.9%  16.7%  18.3%
CAGR-Avg   11.5%  12.9%  15.6%  12.4%  13.6%  15.1%  13.7%  15.0%  15.1%
Yrs gained    25     26     27     26     28     28     26     26     26
Yrs lost       7      6      5      6      4      4      6      6      6
Std Dev    17.2%  18.2%  22.7%  18.2%  19.3%  18.4%  17.5%  17.8%  16.2%
Sharpe Rt    34     41     49     38     43     52     46     54     58

Qtr4/Hold4
sp500   btd4    uv2    uv4   uv4+ uv5/6+    rp4  dspc4   sig4
CAGR-Med   12.4%  14.9%  21.2%  16.9%  19.7%  18.5%  14.9%  14.3%  14.4%
CAGR-Avg   11.6%  13.1%  16.7%  13.0%  14.4%  14.3%  13.8%  13.7%  15.4%
Yrs gained    24     24     25     24     25     25     25     24     26
Yrs lost       8      8      7      8      7      7      7      8      6
Std Dev    19.2%  22.2%  27.4%  21.8%  23.1%  20.9%  20.4%  20.9%  20.5%
Sharpe Rt    33     37     47     37     42     45     43     41     50

```

The Post of the Day may be edited for readability or length, but never for content. The opinions expressed in the Posts are those of their authors, and not necessarily The Motley Fool. We make no claim or warranty as to the veracity or accuracy of any post, and present this feature only as an example of what may be found on our message boards. Don't take the Post of the Day, or anything else here, as gospel and, as our seventh grade English teacher, Mrs. Peacock, used to say, do your own homework, and avoid run-on sentences.