Streetwise for Sunday, February 17, 2019

The financial markets are going to crash. There will be a historic drop in the price of equities. And why is that? The reasoning is simple, what goes up must come down.

That is a sample of the utter nonsense I am forced to refute on a regular basis. And by the way, for a “small” subscription fee, many of those professing such wisdom will advise you on how to avoid the upcoming apocalypse.

Nonetheless, there is no denying that for many investors dealing with Wall Street continues to conjure up continual anxiety. It is not just the inherent concern over potential risk; the concern often embraces a repugnant opinion of those who are purveyors of its products. 

That Wall Street has engendered such a paramount level of suspicion is a curse of its own making, a consequence of having gorged itself on fees and commissions, while at the same time decimating the very nest eggs delegated to it for growth and safe keeping.

Tragically, for many it is too late to prevent the victimization perpetrated by those denizens of the financial world that have an uncanny ability to ferret out a combination of ample financial assets and a lack of investment sophistication.

They proffer as evidence a stream of letters after their name, or an association, however tenuous, with a firm or person of some repute, and finally, a gratuitous dinner offer.

The words remind me of “Have Some Madeira, M’dear”, a folk song from the early 60s made famous by the Limeliters, “You really have nothing to fear. I’m not trying to tempt you, that wouldn’t be right.”

To further complicate matters there are a seemingly endless variety of economic scenarios being proffered up depicting an apocalyptic outlook for the equity world. However, assistance in negotiating such treacherous shoals is available…for a small fee of course. 

Ignore it all. Investing in common stocks is prudent and appropriate at virtually any point in time and generally entails little more than a modicum of common-sense research.

You do not need professional advice or specialized computer software or expensive newsletters and whatever else is being touted these days by those claiming to have an “inside track,” to the Holy Grail of investing, that flawless method for deciding what to buy and when.

There is no Holy Grail, yet for some the search has become an obsession, leaving them vulnerable to the vultures that prey on the uninformed. 

Nonetheless, there is one method anyone can use to build a decent portfolio…in a period of about 20 minutes. Your total commission cost, using a discount brokerage house, should not exceed $25…and you do not have to look at your portfolio for a year.

Yes, it is once again time to revisit the investment theory developed and promulgated by money manager Michael O’Higgins. This often-maligned methodology is most often referred to as the Dow Five theory or Small Dogs of the Dow. 

It was originally described in his book “Beating the Dow,” (Harper Collins Publishers, 1991 and since revised). The strategy limits your investment horizon to the 30 companies that make up the Dow Jones Industrial Average.

The theory consists of selecting the five lowest priced of the Dow’s 30 stocks from the ten with the highest dividend yield. You buy an equal dollar amount, not an equal number of shares, of each of these five companies and hold those shares for one year. 

On the anniversary of your purchase, you again identify the five lowest priced stocks out of the ten with the highest yield and adjust your portfolio accordingly. You add in the accumulated dividends creating additional capital. A Dogs of the Dow mutual fund defeats the low cost, low turnover, aspect of the strategy.

Using the strategy means you become a contrarian investor. Remember, these companies are out of favor. In fact, they might be better referred to as the Underdogs of the Dow. Does the Dow Five theory work every year; no, but the times it does not are relatively few.

Your year can start anytime. The current companies are Pfizer, Coca-Cola, DowDuPont, Verizon and Exxon Mobil. The combined average dividend yield is 3.68 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.