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Author: samdavies Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6186  
Subject: Foolish 4 in Oz Date: 11/13/1998 7:13 PM
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I don't feel I'm the right person to answer PWillis's query (#259). Possibly Wanganeen or illy- whacker could make a better fist of it but here goes anyway.
As I understand it, the 30 stocks making up the Dow are assumed to be so large and diversified as to border on immortality. As such, if they get into trouble - lose focus, become tainted by an Exxon Valdez, are sued for tobacco-related injuries etc - eventually new management will turn them around, and their share price will recover to make way for other shares falling out of favour. The Dogs eventually come good and the contracyclical punters pocket their winnings, and go on to repeat the process.
Now, it's suggested that Australia doesn't have sufficient companies big enough or diversified enough to make up the equivalent of the 30 shares of the Dow. Furthermore, the Australian heavyweights are loaded with resource stocks whose fortunes and share price are largely the result of commodity prices not management skill. Therefore the Dow Dividend theory would not work here. I'm not at all sure this is true. However, we don't yet have a Dow or its equivalent. We have 20 Leaders and 50 Leaders and even 100 Leaders but no-one has yet constructed a Dow Index to try and represent the market as a whole.
I believe we could construct a meaningful index of 30 shares which excludes purely resource stocks. This would then give us a base for the other thing we need to do - back testing. Of course, we won't all agree on the correct 30 shares. There's still plenty of controversy in the States every time the Dow is altered (as it will be next Tuesday) but most of the argument will, like sports teams, be about numbers 27 to 30 and not the first 25 or 26.
I would welcome the suggestions of Wanganeen and other Fools on what should make up our Foolish 30. Once we iron this out, I've no doubt we'll get a few of our 'computer numerates' who can backtest the theory even if only back to the 1970s.

SamD.




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Author: Wanganeen One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 265 of 6186
Subject: Re: Foolish 4 in Oz Date: 11/17/1998 6:46 AM
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Sam,

I am more than happy to give you my opinion on this subject. There have been several discussions on this topic in the past, which you might find interesting to look over.

I have not been a proponent of the Dow approach, not because it would be unable to beat the All Ordinaries. It has been shown by the research done by Nomura Securities that traditionally such an approach would have achieved this. However, the same research also showed that by picking the companies in the index with the highest PE ratios at the begining of each year and selling them at the end the returns would have been much higher. I remember I have stated the results of this research more completely in an earlier post.

My theory on this is that the best managed companies in the industries with the best prospects for growth will be the most successful. Unfortunately they will also, in most cases, be the most sought after and so will sell at a premium. I believe this is especially true in a small market like that in Australia.

In saying this I would like to add that I do not like mechanical styles of investing. I think it is wise to spend a little time on research.

The Qualiport that has been created by Fool UK is more my style.

I look forward to hearing your reply.

Foolish regards
Alistair



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Author: StubbleJumper Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 266 of 6186
Subject: Re: Foolish 4 in Oz Date: 11/17/1998 8:40 AM
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Samdavies wrote:

Now, it's suggested that Australia doesn't have sufficient companies big enough or diversified
enough to make up the equivalent of the 30 shares of the Dow. Furthermore, the Australian
heavyweights are loaded with resource stocks whose fortunes and share price are largely the result
of commodity prices not management skill. Therefore the Dow Dividend theory would not work
here. I'm not at all sure this is true. However, we don't yet have a Dow or its equivalent. We have
20 Leaders and 50 Leaders and even 100 Leaders but no-one has yet constructed a Dow Index to
try and represent the market as a whole.



Hi Sam,

For what it's worth, the Dogs of the Dow approach has been tried with varying degrees of success on the Canadian (Toronto) stock market. Most testing has revolved around the TSE35, the largest 35 companies listed. Like Australia, we have an abnormal influence from resource sectors. I am uncertain whether this would be more or less pronounced in Oz. Another major difference between the Dow30 and the TSE35 is that in Canada we have an abnormal representation of banks (or shall I say integrated financial services providers?) on our stock exchange. Five of the 35 are in fact large banks.

Anyway, applying the standard methodology to the TSE resulted in only moderately higher returns than just buying the index. Currently, there are a few people working on a Made in Canada dogs of the TSE approach, so we will have to wait and see....

Just my two cents.

Rod


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Author: JerryCornelius Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 267 of 6186
Subject: Re: Foolish 4 in Oz Date: 11/18/1998 8:44 PM
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Wanganeen said: "In saying this I would like to add that I do not like mechanical styles of investing. I think it is wise to spend a little time on research. "

Wise counsel indeed.

I have been thinking about this foolish four idea for a while now. Last December I used the approach to pick 4 or 5 stocks out of the 50 Leaders using the high-yield, low (dollar) price approach. 11 months later, here are the results:

Burns Philp (-57%)
Aust Cons Investments (-21%)
Brierly Investments (-61%)
Aust Property Fund (-9%)
Gandel Property Trust (+11%)
------------------------------
Average performance -27%

One of the key problems with using the Dow Dividend Approach in Australia (in addition to the ones already mentioned):
The high yield stocks are typically banks, property trusts and investment companies.

Has anyone had any success in applying the DDA to Australian stocks? (Fortunately my dabble was a theoretical one)

Regards
JerryCornelius (formerly known as PWillis)

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