Dear Mr. Berko:

Dear E.T.:

The Dogs of the Dow strategy will no more beat the stock market than the Hound of the Baskervilles. And if you employ a money manager to adjust your portfolio annually (as required by this strategy), the 1.5 percent management fee plus commission costs would have dumped your portfolio in the tank for the past 10 years.

This cockamamie investment style was popularized by Michael O’Higgins in his book “Beating the Dow,” which made the best-seller list in 1992. The concept is as simple as Simon, which is why it attracts so many idiots.

Your investment club treasurer, even though he’s a CPA, is out of his depth in a parking lot puddle. I’ll tell you how the Dogs strategy works and then how it hasn’t worked for the past 10 years.

The theory is based on the purchase of the 10 highest-yielding stocks among the 30 issues that make up the Dow Jones industrial average. The term “Dogs” is based upon the supposition that these issues have fallen out of favor on Wall Street.

So if you have $100,000 to invest, you will invest $10,000 in each of the 10 stocks. At the end of the year, you must select a new high-yielding portfolio using the closing price on the last day of trading for the previous year. But it doesn’t work, and here is proof:

The following is the closing performance from 2000 through 2009 for the 10 Dogs of the Dow. In 2000, the Dogs were plus 6.4 percent; in 2001, minus 4.9 percent; in 2002, minus 8.9 percent; in 2003, plus 28.7 percent; in 2004, plus 4.4 percent; in 2005, minus 5.15 percent; in 2006, plus 30.3 percent; in 2007, minus 1.4 percent; in 2008, minus 41.6 percent; and in 2009, plus 12.9 percent. In this 10-year time frame, the Dogs had five up years of 82.7 percent and five down years of 61.9 percent. So during those 10 years, the Dogs would have gained 20.8 percent, or a 2.08 percent annual return. Most money market accounts would have outperformed them.

The following are the closing performances from 2000 through 2009 for the 30 stocks in the Dow Jones industrial average. In 2000, the Dow was minus 4.7 percent; in 2001, minus 5.4 percent; in 2002, minus 15 percent; in 2003, plus 28.3 percent; in 2004, plus 5.3 percent; in 2005, plus 1.7 percent; in 2006, plus 19.1 percent; in 2007, plus 6.4 percent; in 2008, minus 33.5 percent; and in 2009, plus 28.8 percent. In that 10-year time frame, the Dow had six up years for a 79.6 percent gain and four down years totaling 58.6 percent. During those 10 years, the Dow had a gain of 21 percent, or a 2.1 percent annual return – a tad better than the Dogs.

If you paid an adviser 1.5 percent fee plus commission, you would have bupkes for your efforts. There are no formulas that consistently beat the market. But there are a lot of con artists who say they can.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com