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Of dogs and hemlines
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February 3, 1998: 5:32 p.m. ET
Experts say 'Dogs of the Dow' and other investment strategies have risks
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NEW YORK (CNNfn) - As the U.S. stock market leaps to record levels, new investing strategies are materializing every day to capitalize on the momentum.
You can follow the "Dogs of the Dow," or put your money in "value" stocks. You can even be a "contrarian," or a disciple of "momentum" investing. The list is endless.
But riding with the bulls isn't easy -- and there are risks, Wall Street insiders say.
"We've had such a good market that a lot of strategies have been shown to work," said Liam Dalton, president of Axion Capital Management, an investment management firm in New York. "I don't think you should drive by looking in the rear-view mirror."
One popular approach, the Dogs of the Dow, puts investors in undervalued, overlooked stocks, said Pete Grosz, president of VP International, an investment adviser in Downey, Calif. His company uses the method exclusively.
The idea is to buy the 10 stocks in the Dow 30 with the highest yield on the last day of the year, Grosz said. A variation is to buy the "Small Dogs," which are the five cheapest stocks out of the 10.
The Dogs had returns of 22.2 percent in 1997, compared with 23.8 percent for the Dow industrials, Grosz said. The Dogs' average return since 1973 is 17.7 percent, compared with 11.9 percent for the Dow industrials.
"This is definitely intended as a long-term strategy," Grosz said. "It's that high dividend yield that puts you in stocks that can weather the storm slightly better."
Peter Tanous, president of Lynx Investment Advisory Inc., an investment firm in Washington, D.C., thinks strategies that look at past results are flawed because they can't predict the future. He is author of "Investment Gurus," a compilation of some top Wall Street approaches.
"The 'Dogs of the Dow' is like the 'hemline indicator,' that showed the market tended to follow women's hemlines," Tanous said. "The problem is these formulas work in the past, but when you look forward, they tend not to work."
Grosz said Tanous has a point. But he added, "Anybody who invests tends to use the past to somehow predict the future."
Another common strategy, momentum investing, advocates buying stock in companies with earnings growth that surpass the S&P 500 average, Dalton said.
"Unless you're very early (buying) a momentum stock, you're going to be subject to serious volatility," Dalton said.
Consider what happened with Iomega Corp. (IOM), a classic momentum stock, Dalton said. The company, maker of the popular Zip drive computer storage device, went from 2-7/8 in January 1996 to 27-1/2 in May 1996 (the numbers are adjusted for stock splits).
"The stock collapsed back down to 6 in two months because (the company's) growth rate was 650 percent in 1995 and it slowed to 87 percent in 1996," Dalton said. "Eighty-seven percent is fast growth -- but it's at nosebleed valuations."
Index buying, where you follow the stocks in indexes such as the S&P 500, has been reliable, Dalton said. But the downside is you'll never do better than the index, he said.
"If the market goes down, you won't have a defensive posture," Dalton said.
Contrarian investing, which is buying stocks that are out of favor with Wall Street, has also been a popular strategy, Dalton said. Yet in today's market, there's always a valid reason when stocks are out of favor, he said.
"Contrarian investing was better when the economy was more cyclical, when basic industries were the primary growth engines for the entire economy," Dalton said.
Tanous of Lynx Investment said one approach to avoid at all costs is market timing, where you try to guess when the market will rise and fall to "time" your trades.
"The dumbest thing you can do is try and time the market," Tanous said. "That is sheer folly. To time the market accurately you have to have one quality that most people don't have: clairvoyance."
Lastly, many industry watchers say investors should stick to the tried and true methods: Diversification of your portfolio, and buy stocks and hang onto them.
Dalton advises investors to pick a game plan and stick with it. He uses Growth at a Reasonable Price. He buys stock in companies with growth in earnings and revenue that are undervalued compared to other companies in the same industry group.
"If you want any success, you have to follow (a method) over time," he said.
Tanous recommends a combination of "passive" and "active" strategies. The passive part is to buy index funds. The other component is to follow the advice of good money managers.
James Griffin, an investment strategist at Aeltus Investment Management in Hartford, Conn., thinks the emphasis on quarterly performance in mutual funds has encouraged individual investors to focus too much on short-term results.
"We don't want to encourage people to swing from the fences," Griffin said. "If we're talking investment, we're talking longer-term."
-- By staff writer Martine Costello
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