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The Unauthorized Dow FAQ and Compendium of Related Effluvia

[last updated, probably (though not necessarily) in some tiny way: 3 April 2001]

This FAQ is not written or maintained by the official TMF organization. It instead represents the collective contributions and opinions (not always unanimous) of the many, many non-TMFers who have participated in this discussion board for their mutual benefit. We are, though, all indebted to TMF for providing this forum and inspiring the discussion in the first place, as well as often posting excellent articles, several of which I reference below.

Note: when a Message # is given, you type that number into the "Number" box above, and then click the "Go" button to view that message.

[NEW] <- Indicates a change since my last posting of this FAQ.

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The Foolish Four strategy has been officially dropped by The Motley Fool.

Here is the official TMF article by the Gardner brothers describing the decision to drop the Foolish Four:

[Editorial follows...]

Unfortunately, the reasons cited in this article are very disappointing to many of us. This article and its follow-up articles and postings all indicate that the Gardner brothers and Ann Coleman still fail to understand the two fundamental criticisms of the Foolish Four referenced below -- excessive datamining and failing to distinguish between in-sample and out-of-sample data sets when testing a strategy.

For example, Ann still doesn't understand the relationship between using January figures to "discover" the strategy and the result that January-start portfolios performed better than other starting months. She mistakenly thinks that the January outperformance was a "random statistical variation", while it is actually a predictable result of excessive data mining:

Indeed, Ann Coleman still believes that the Foolish Four is a valuable investing strategy, if used in a tax-deferred account:

Strangely, though, she intends to change her mind on this based on a single additional data pont:

[...end of Editorial]

Datasnooper -- who is rather more cynical than me when it comes to ascribing motivations to Ann and the Gardners -- summarized some of his problems with TMF's stated reasons for dropping the Foolish Four here:

[NEW] On the other hand, one persistent fan of Dow Dividend investing, rkmacdonald, feels that all of the statistics-based arguments against the past success of these strategies are "not conclusive", and that "reasonableness" is more important. For a summary of his position, see:

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If you just have a question about the mechanics of following the Foolish Four investment strategy, you can skip this section. Your question has been asked before, and some answers to it are referenced below.

If you are wondering whether the Foolish Four strategies are indeed a good place for your money, and/or trying to figure out what the bulk of recent posts on this board are talking about, then here's some information to get you started:

Starting in November 1999, a poster named Datasnooper started several threads exploring whether there is any statistically defensible basis for expecting any of the DDA strategies to continue to work. There have been lots of threads involved in this discussion, and you will have to ignore a lot of emotional responses and name-calling (including several early posts by the author of this FAQ) to find the meat of these discussions. That meat often involves fairly complicated statistical calculations, but plain English explanations are present as well.

I once started to prepare a summary of all these threads, but after putting several hours into just reviewing the first batch am currently taking a break to continue with the rest of my life. Eventually either I or someone else will provide a readable summary (
see messages referenced below), but for now you should do a lot of reading on your own if you want to understand the discussions on these topics.

(Note that I am choosing to say nothing at all about the ongoing frequent posts by
qwerty1999/2001. For a hint of why not, see my Messages #31030 and #34983.)

Here are a few attempts at a summary of the overall discussion:

Message #34123
Message #35190
Message #35768

And one summary of the "January Effect" issue in particular:
Message #34426


Introductory Links

Here are some excellent links to articles for those of you just getting started here. They are from an extensive collection of links compiled and generously shared by SailBadtheSinner.

Investing Basics

Fool's School

The Dow Dividend Approach, including the Foolish Four

Reasonable and unreasonable expectations

Second-guessing a mechanical strategy

Your personal risk profile

All Aboout IRAs

Some other Motley Fool discussion boards:

Discount Brokers

DRiP Investing


Retirement Investing

Tax Strategies

Foolish Workshop


The Dow Dividend Approach Methods

Today's list of Dow Jones stocks, including today's Foolish Four (RP) rankings

Definitions of FF, UV4, RP4, DsPc, SIG4, etc, etc
Message #9230
Message #11266

Note: The Motley Fool Investment Guide described a 2-2-3-4-5 approach. This is now sometimes called the Old Foolish Four method. In 1998 it was officially replaced by the UV4 method described in The Unemotional Investor, which either does 1-2-3-4 or 2-3-4-5. So during 1998 the method called "Foolish Four", "Fool4" or "FF" was the same as "UV4".

Meanwhile, contributors to this board have devised the RP4 approach, which does better than UV4 and is now the favored method for most of us.

As of January 1999, official TMF articles and postings usually mean "RP4" when they use the term "Foolish Four". Considerable ambiguity persists, however, so I personally recommend that the rest of us abandon the term "Foolish Four" and explicitly use "UV4", "RP4", etc.

The DsPc4 method is identical to RP4, except that RP4 always drops stock #1 while DsPc4 never does. In backtesting RP4 has beaten DsPc4 for portfolios started in January, while DsPc4 has beaten RP4 for portfolios started later in the year. Recently (
Message #14736) RayVT has also checked a variant that drops stock #1 only when it is the lowest-priced stock (as per UV4).

A newer approach is SIG4. In backtesting it has beaten DsPc4 for mid-year starts, but has not done as well as RP4 for portfolios started in January.

Yet another recent DDA variation is EY ("Empirical Yield").

Message #9230 provides the details of each of these methods. Message #11266 describes EY and compares its returns with those of the other methods. Message #8745 addresses this January stuff.

Why is the "RP" strategy sometimes called "ER" or "ERP", and where did it come from, anyways? (Bob Price's discovery of RP)
Message #1762 (Elan Caspi's discovery of ER)
Message #2007 (Bob Price's reaction to Elan's discovery)
Message #2026 (Bob Price's explanation of why he hadn't publicized RP) (the final outcome)

Why do almost all of these strategies take price into consideration (in addition to dividend yield)? For example, if a stock splits, then all of a sudden it will jump way up in the list, but actually its value is unchanged.
Message #12336
Message #12345
Message #21255
Message #34039

Doug Wade has written a summary that puts everything in the DDA universe into perspective.
Message #13041

Historical returns of various DDA strategies
Message #9230 (includes links to many must-read messages)
Message #7791
Message #11266
Message #11493
Message #19127
Message #22337 - drosophilosopher's analysis, using the TMF monthly Dow database
Message #22564 - Timberfool's analysis, using his own monthly Dow database

Have we found the best possible DDA strategy? Or might there be an even better one out there, still undiscovered?
Message #22927
Message #23970

Jonathan Jackel (jjackel) has created a Web site that briefly summarizes each strategy and the returns that have been calculated for it through backtesting. (You can also learn about non-DDA screens that are discussed on the Foolish Workshop board, such as Spark5, Keystone, PEG5, etc.

yotommy created a real-time calculator that showed the current ranking of stocks using any of several strategies (including RP, SIG, and EY) and any of several stock indexes (Dow, S&P 500, Domini, etc). As of May 1999, this has been largely superseded by a calculator here on the TMF site:
Unfortunately, the TMF calculator only includes a few currently TMF-sanctioned strategies, such as RP4, and only for the Dow and the S&P 500. yotommy's site will still help you download current quotes for any of the various indexes, if you are willing to then perform your own calculations:

Brian Finney has created his own calculator that includes not only the various DDA strategies, but also many other strategies from the Foolish Workshop board:


Frequently-Asked Practical Details

Do these returns take commissions into account? How about taxes?
Message #9035

Do I reinvest the dividends, or what?
Message #15262
Message #17043
Note: All of the DDA calculations here on the Web site and in the Motley Fool books assume that your dividends just sit idle in your brokerage account until you next rebalance your portfolio. We're talking a relatively tiny amount of money here, so don't worry about it.

I only have $2,000. Can I start a DDA portfolio?
Message #8229
Message #8647
Message #11610 (and its follow-ups)

How can I add money each month to my DDA portfolio?
Message #8411

Okay, I'm ready to buy stocks! Am I supposed to pick the ones on the list from January 2? Or the ones on today's list? And why are these different from the ones on yesterday's list?!
Buy the stocks shown on today's list. (The list can actually change every day, as the price of each stock changes.)

Okay, I'm ready to buy stocks! Can you give me a hand in figuring how to divide my money among the four stocks I've picked?

I have two different accounts (two IRAs, or an IRA and a non-IRA, or my account and my wife's account, or...). Can I split my DDA portfolio over the two accounts, with 2 of my four stocks in one account and the other 2 stocks in the other account?
Message #11898

Waterhouse Datek, Brown... which discount broker should I use?
When you follow this link to the Discount Brokers board, click on any of the messages there, and then check out that board's FAQ link.

Instead of paying commissions to a broker, why can't I use DRiP (Dividend Reinvestment Plan) accounts directly with each of the companies?
Message #13598
Also, from the "Drip Investing - Companies" board, this entire thread:
This Fribble also addresses this question:
But then be sure to read:
Message #22597


1998's big controversy: Holding Period and Seasonality

Should I hold my portfolio for 12, 18, or 24 months?
Message #8745
Message #27571

Note 1: These considerations are independent of capital gains tax policies, although some of the investigations were first prompted by 1997's 18-month capital gains discount.

Note 2: Be sure to note how tiny is the benefit of longer holding periods over shorter ones. I now think this issue has been rather a tempest in a teapot.

Does it matter when during the year I begin a DDA portfolio?
Message #8745
Message #21075
Message #23970

Okay, so maybe I should start in December or January. But it's now some other month. What am I supposed to do in the meantime?
Message #8983
Message #21103

The official Foolish Four portfolio whose returns are posted every day on the TMF Web site seems to have been started on December 27. Is that a special date? Am I supposed to start my portfolio on December 27?
Message #14184

Note that The Motley Fool has also invested some money in other Foolish Four portfolios, within the Rule Maker and Rule Breaker portfolios. Each of these has its own start date, they don't all necessarily follow the RP4 method, and each has its own plans for when to rebalance. Don't worry about all these -- none is an "official" Foolish Four portfolio for you to copy. Consider them examples of using this approach to investing.


Capital Gains taxes

I thought I need to hold stocks for 18 months to avoid short-term capital gains taxes.
That law has been changed. As of the start of 1998, you must hold for a year plus a day to qualify for the long-term rate.

How about in an IRA or 401(k) account?
There are no capital gains taxes paid on these accounts, whether you hold for ten days or for ten years.

If I start my DDA portfolio this January, and then I always rebalance it after a year plus a day, in a couple of decades I'll be starting in February!
Basically, this article suggests that when you hit the occasional bad year, with a very small gain or with a loss, then move your rebalance date back a few weeks to reset your calendar.


Personal refinements

I'm just positive that the market is due for a correction. Shouldn't I wait a few months for things to settle out before I start investing?
Message #8985

What should I do at the end of 1999? Will the Y2K bug destroy the economy? Will my broker lose track of all my money? Should I sell all my stocks in November '99 and buy rice, beans and bullets?
Message #14976
Message #14978

Suppose that one of my stocks shoots up more than, say, 20% after just a few months. If I make a policy of selling at that point then I will have locked in my gain on that stock for the year, rather than having to sit and watch as its gain drops back during the remainder of my official holding period.
Message #13861
Message #14790
Message #16883
Message #19738
Message #21897
Message #28724
Because everyone's DDA portfolio shot up during the first half of 1999, there has been a lot of discussion of variants on this idea. Message #13861 is a very concise summary of the reason that the idea probably won't work in the long term. In Message #14790 exmsftfool backtests a few different early-sell approaches, confirming his earlier intuition. In his unusually patient Message #16883, RayVT repeats his fundamental reasons for doubting this approach. And in Message #19738, PhotoPhool offers some further points to consider. Message #28724 by rkmacdonald summarizes his own preliminary analysis of this issue.

In Message #21897, William Lipp sums up his analysis, begun in Message #21851 (<>), backtesting a simplified strategy of rebalancing at 6 months if the portfolio has already achieved a specified gain.

I've heard that a DDA portfolio usually makes most of its earnings during its first few months, and then just holds steady or even falls during the rest of the year. So I'm thinking of buying in January, selling in, say, May, and just holding onto my cash until next January. Good idea?
Message #20160
Message #20485

I still don't trust these purely mechanical screens. Why shouldn't I add some fundamental analysis to my buy and sell decisions?
This post is from the Foolish Workshop board, but is an illustrative story in any case.

One of the FF stocks is in a company that is having problems lately. Can I skip over that one?
- You can do whatever you like -- it's your money.
- Why do you think that company has made the current FF ranking? These are supposed to be the "Dogs of the Dow." You're going to be holding it for 12/18/24 months -- will the company's problems last that long?
- If you skip one of the top-ranked picks, you're no longer following the mechanical DDA procedure. Therefore the return of your portfolio cannot be predicted based on the backtesting that's been done on the mechanical procedure. If you're lucky you'll do better than the DDA, if you're not lucky you'll do worse.
- As long as all of your picks are still within the top 10 high yielders, you probably won't do particularly badly. See the following two reports:
Message #4765

One of the FF stocks is in a company whose products or policies I personally dislike. Can I skip over that one?
- Same answers as above.
- Posting this question to this message board will usually result in a brief flurry of messages in which a few people with strong convictions one way or the other will restate those convictions, a few other people will offer new comments, and then the whole thing will degenerate into name-calling. You might want to instead explore the Motley Fool board on "Socially Responsible Investing."

For just a few representative threads addressing this issue, start with any of these messages and read all of the messages that followed them:

The Socially Responsible Investing board is: <>.

And, for the record, there is only one "L" in "Philip Morris".


Now that you've begun your DDA portfolio...

I started a DDA portfolio a few months ago, and I haven't made a penny. Should I bail out now?
Message #8590

One of the stocks in my portfolio has just gone way up. What should I do now?
Message #8590
Message #13368

One of the stocks in my portfolio has just gone way down. What should I do now?
Message #8590

My DDA portfolio has been doing terribly! Should I give up on it, and maybe on the DDA strategies in general?

Okay it's been a year and now I'm ready to sell last year's four companies and buy my four companies for the coming year. But one or two of last year's stocks appear again in this year's list. What do I do about these hold-overs?

What do I do if one of my companies spins off a subsidiary? Or gets acquired by another company?
Message #14667
Message #15109


Historical Data for Your Own Backtesting

Historical daily data on the Dow, since 1896
Message #9019

Other sources of historical data on the Dow and the S&P 500
Message #10448 Ray's S&P 500 annual returns for 1960-1998
Message #10449 Some URLs and stuff from Ray
Message #10888 Prophet Information Services CD
Message #11444 S&P 500 from BARRA and FRED
Messages #11960, 12399 Yahoo
Message #12302 Stock Tools
Message #21987 Dividends and Splits Big Charts Lotsa links to lotsa sites

The ultimate backtesting data source
As of April 1999, Hinds Wilson (TimberFool) will be selling the Dow Monthly Database (DMD) that he has compiled. This is an extension of his previous quarterly database that TimberFool, MontanaFool and RayVT have been using for all of their backtests referred to throughout this FAQ. Some excerpts from Hinds' extensive information sheet:

DMD contains prices, dividends ('regular' and 'special'
shown separately), earnings per share (EPS) and
(calculated) yields for every stock in the DJIA from
January, 1965 through March, 1999.

All the data are in Excel 5.0/95 format spreadsheets.

Included with DMD are the raw data, extended data sets, an extensive library of macros for calculating and analyzing returns, and electronic documentation describing in detail the contents and use of DMD.

To order the DMD, contact Hinds at <>.


Statistical and Philosophical Concerns

All these strategies! All these refinements! Have we really discovered an investment method that will work in the future? Or have we just been overfitting a small dataset by trying a zillion strategies and picking those that by random chance happened to have done the best in the past?
Message #28334 (a simple explanation of the term "data mining")
Message #30409 (more on terminology)
Message #10101

Message #10101 is a post by QFT, also posted on the Foolish Workshop board as <>. These are far from the only threads discussing these issues, but QFT's posts and the following discussions make some important points very clearly, even if you don't understand all of the statistics presented. In particular, dwade's <> puts the January effect and the drop-the-first-stock-if-whatever issues into context quite nicely. It also provides a good justification for diversifying your investments among different sorts of value and growth strategies. (For more on diversifying your strategies, see dwade's <>.)

For a strong rebuttal to the main topic of QFT's post, regarding the statistical likelihood that the DDA methods are bogus, see:
Message #10289

For my own meta-comments in a later thread, about the significance of all these tests of significance, see:
Message #11763

Yeah, yeah, very impressive statistics. But you can prove anything with statistics! For example, it's been shown that whether the NFL or the AFL wins the Super Bowl is an excellent predictor of whether the stock market will go up or down that year. So the Foolish Four makes no more sense than that.
Message #26225
Message #26260

Is skipping stock #1 rationally justified, or has its underperformance just been a statistical fluke over the past few decades?
This is currently an area of active investigation. Follow the threads that begin with the following messages to read all about it.
Message #22337 - drosophilosopher's analysis, using the TMF monthly Dow database
Message #22564 - Timberfool's analysis, using his own monthly Dow database

How risky are DDA strategies? I've seen mentions of standard deviations and Sharpe ratios as measures of risk, but how do these relate to long-term investing?

With so many people and funds now following DDA investment strategies, won't the January prices be artificially inflated by all these buyers of the same few stocks? Therefore, won't the DDA strategies fail because of over-popularity?
Message #15134
Message #17630
Message #31815

I hear that the inventor of DDA investing (Michael O'Higgins) now claims that it doesn't work anymore. What's with that?!
Message #12991
Message #15044

I hear there was a critique of the DDA approach in a March/April 1999 issue of an academic journal, by McQueen and Thorley, in which DDA is dismissed as excessive "data-mining". What's the story?
Links to one version of the original article, a summary, and a response from Jim O'Shaughnessey:
Message #22204
A copy of Jim O'Shaughnessey's response:
Message #22228
TMF's Ann Coleman's and Chris Rugaber's series of responses, including an explanation of the genesis and evolution of the Old FF strategy, the UV4 strategy, and the RP4:

Link to their second article, of February 2000:
Message #31647
My impression of the second article:
Message #31676

What about Jason Zweig's critique of DDA investing in the August 1999 issue of Money?
Jason Zweig's original article:
TMF's Ann Coleman's first reply:
Miscellaneous reader comments:
Jason Zweig's rebuttal:
Ann's response:

Here is a nice summary of critical studies of DDA strategies:

Editorial note: I feel that too much is made in some of these criticisms regarding the deleterious tax consequences of DDA strategies. Many users of DDA strategies are in Roth IRAs, 401(k)s, etc. Rejecting DDA strategies because they may have a disadvantage in a taxable account ignores this reality.


Dow Dividend Approaches without the Dow

Has anyone ever tried this sort of approach with, say, the S&P 500 rather than the Dow Jones?
Message #7226
Message #7399

Ooooh, cool! Has anyone specifically tested the RP4 method with the S&P 500?

How about the NASDAQ?
Message #13229

What about with some other index, say a "socially responsible" one?
Message #8642
Message #9670

yotommy has created a real-time calculator that shows the current ranking of S&P 500, Domini, Citizen's Index, and other stocks using any of several strategies (including RP, SIG, and EY):

I'm a Canadian. Can I apply the DDA methods to Canadian stocks?
Message #9805

How about Europe?
Message #17964



What's Benchmark Investing and Trouncing the Dow? There seem to a lot of posts on this board about this stuff.
Frankly, this discussion doesn't really belong on a board dedicated to DDA investing. You can think of BI/TTD as a Foolish Workshop strategy (complete with Value Line data) that just happens to restrict itself to Dow stocks.

Benchmark Investing now has its very own discussion board:

What are these "SPYders" that people mention from time to time?

So why are SPYders better or worse than an S&P 500 Index Fund?
Message #17235

How can I track the return of my portfolio, so that I can compare it to, say, the S & P 500?

Are there some particular books about investing that you'd suggest I read?
Message #9173


Fool Board Stuff

How do you boldface a word or phrase in your posts here?
Type these three characters before the word or phrase: <b>. Then type these four characters after the word or phrase: </b>.

How do you italicize a word or phrase in your posts here?
Type these three characters before the word or phrase: <i>. Then type these four characters after the word or phrase: </i>.

How do you insert a table inside of a post here?
Before the table, insert a line with these five characters: <pre>. After the table, insert a line with these six characters: </pre>. (This results in a monospaced font for the table, so that every character will have the same width and any series of spaces you type will be maintained exactly as you've typed them.)

What do some of these other things do, such as this Threaded gizmo? Any other hints on optimal use of these message boards?

IMHO, IIRC, BWDIK, ... help! What do these things stand for???

Why does this board contain thousands of messages just to discuss a strategy that's supposed to take 15 minutes per year?
Message #13058


History of this FAQ

Started in July 1998 as the "ARGGGGHHHH!!!! FAQ," this post was intended to head off certain questions that appeared on this board at least a few times each week (and sometimes a few times each day). This phenomenon had caused some regular denizens of this board to throw their monitors out the window in despair. But since my office is on the first floor I found this response unsatisfying.

Therefore I began posting the ancestor of this message twice a week. Gradually the FAQ began accreting information that went beyond the original ARGGGGHHHH!!!!-generating questions. In September 1998 its name was therefore changed to "The Unauthorized Dow FAQ and Compendium of Related Effluvia."

In December 1998, TMF added a link on the Dow Investing pages to take you directly to this FAQ (hopefully the latest version of it). So now I only post the FAQ to the board when it has undergone some updating -- which I'll try to keep down to a minimum.

As always, please send suggestions for changes or additions directly to me at <>.

Dave Goldman
Portland, OR



How can I thank you and fredochs for posting your helpful FAQs?
Speaking just for myself, I'd prefer that you not clutter up the message boards with thank-you messages. I'm just paying back all the help others have given me -- you can repay me by helping other people in the future.
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