Then I was in high school, I was working in a dollar store over the weekends. Day after day, I was watching kids buying different toys; during summer time, little boys were buying small guns and pool stuff. During winter time, everybody was looking after crazy carpets and parents were buying scarf (2 for 1,50$) since their kids were losing them on a weekly basis. Then came the Pokemons. At first, kids were coming every Tuesday (that was the day we used to receive our stock) and got in line to buy the new one.
Those small things were selling like crazy and they were so expensive, it was ridiculous (so the parents thought anyway!). After a while, we start selling them with a special price (2 for 1) and then, they were selling for almost nothing. Why was that? Everybody were selling them, kids had a handful of them and parents were getting pretty much pissed to spend $25 per week in pokemons 😉 When there is too many people engaged in something, it is often the beginning of the end…
This is what might happen with the Dogs of the Dow strategy. This passive investment strategy is based on buying the top 10 highest paying dividend stock of the Dow Jones. Every year, you do the same exercise and you sell those who didn’t make the cut to buy the new good dividend stocks.
The principle behind the Dogs of the Dow is to buy undervalued stocks (this is why they are paying such a high dividend yield) every year. On one side you are supposed to buy cheap stocks, on the other side, these same stocks are giving a really good dividend rate.
From 1975 to the year 2000, this strategy shows an investment return of 17.7% versus 15% for the Dow Jones index. This means that $10,000 invested following the dog of the Dow investment strategy in 1975 now worth 588K versus 329K if you have invested in the Dow Jones index. Quite a difference for a stupid rule, isn’t?
However, the problem is that the rule is so simple to follow that anybody can do it. Therefore, people started investing following the dogs of the Dow strategy and massive cash flow were invested. Do you know what happen to an investment trick when everybody follows it? The trick gets so popular that it doesn’t work anymore as everybody is buying and selling the same stock at the same time. This means that you have to pay a higher price when you buy and get less money back from your sell.
For example, at the beginning of 2008, while the Dow Jones was dropping by 15%, the Dogs of the Dow dropped by 25%. Does the strategy will keep working in the future? Let just say that what was obvious 10 years ago is not so simple today!
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