Insider Christopher Byron |
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Dogs of the Dow
When the stock market collapses, as it did in 2000, individual stocks can be utterly obliterated. But, amidst the rubble, there is a strategy that never seems to fail.
What a difference a year makes. Consider, for instance, JDS Uniphase (JDSU). In 2000, this high-flying, widely held maker of fiberoptics products was selling for $140 per share. By May 2001, it was at a low of $20 -- a fall of 78%, -- but fell even further to under $6.00 by March, 2002. Or, CMGI (CMGI), which had also seen its stock soar to $140 in 2000, only to see it come screaming back to earth, losing 95% of its value in the process. Or, Yahoo! (YHOO), once the stalwart of the Internet economy, down 88% in 2001, a year after reaching an all-time high.
These were calamitous losses by any measure, yet there was not a single stock in the Dow 30 that performed even half so poorly. While many of the Dow components suffered tumbling stock prices, with Eastman Kodak (EK) and Microsoft (MSFT) possibly faltering to the greatest degree, it was nothing to match the headlong fall of the NASDAQ.
TURN LEMONS INTO LEMONADE
One good way to capitalize on this is through the so-called Dogs Of of The the Dow investment concept. The strategy is based on regression-to-the-mean theory, popularized by contrarian investor David Dreman. The theory holds that in any population (human beings, stock, prices, -- it doesn't matter) there's an average in the middle, around which most of the population tends to cluster. For stock prices, this means that cheap stocks tend, over time, to rise in value, while expensive stocks tend to decline.
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