From: "Oliver Keating" 
Newsgroups: misc.invest.stocks uk.finance uk.finance.stockmarket
Subject: A UK version of "Beating the DOW"
Date: Sun, 17 Apr 2005 01:25:01 +0100

I don't know if anyone is familiar with Micheal O'Higgins "Beating the DOW" 
strategy, whereby each year you invest in the 5 cheapest of the top 10 
highest yeilding stocks in the DOW Jones Industrial Average, a method of 
producing historically annualised 20% gains... Thats no small feat, for 
about 15 minutes work a year you have beaten about 90% of fund managers. Of 
course whether or not it continues to work will remain to be seen, but that 
is always going to be the case with any strategy, until you give up, 
subscribe to EMT and go into an index fund.

I like such strategies, I think investing should generally be a "hands off" 
approach, and this follows a contrarian strategy by investing in stocks that 
are currently "out of fashion" and hence selling at a discount, evident by 
the high yeild.

This is all nice and good but as a UK investor there are transaction costs 
and x-rate uncertainties which make following American equities less 
favourable...

I was thinking about how this could be translated into the FTSE-100, but 
there are a few problems:

1) One of the principals of the DOW stocks is their staying power, they are 
big companies and people underestimate their ability to survive hard times. 
While all of the DOW stocks have market caps in excess of $10bn, some of the 
FTSE-100 companies are much smaller than this, some with a market cap of 
only just over £2bn. If you want to bet on a stock that has been beaten up, 
you want to know that it isn't on a company thats about to fall over, and 
that means its gotta be big.
2) The DOW companies are selected more than just size, but also their 
positions in their industries - i.e. market leaders... this is an exclusive 
pre-selected group of quality companies.
3) O'Higgins suggests using dividend yeilds as a barometer of value. Unlike 
P/E figures, this can't readily be munipulated using clever accounting. 
American companies have a culture of steady dividends, while the earnings 
per share may fluctuate year on year, dividends are held steady or raised 
conservatively. A year of bumper profits will affect favourably on the P/E 
but the dividend will not change. Dividend yeild is a useful valuation on 
historical terms... a high yeild says the stock price is low. This does not 
work so well in the UK, where dividends are allowed to fluctuate in relation 
to earnings. A high yield may simply result from a bumper year of profits.
4) Prices of U.S. stocks tend to trade in the $10-$100 range and are 
generally bought in round lots, O'Higgins suggests the low prices stocks are 
more vounerable to large percentage price movements on the back of bad news, 
simply because people look at the dollar changes in price and not just 
relative changes - as he said "a $5 decline in a $100 stock makes the news, 
but not a $1 in a $20 stock" - not rational. Therefore, if and when they do 
recover, the low ones will have further to go (percentage wise). The UK 
price stocks in pence, and has an enourmous range of prices, some trade 
around 10p, others 1000p or more, and because "round lots" are not really 
considered, I think UK investors are less prone by the equivalent "dollar 
movements" in stock prices.

Now, all of these factors, in my opinion, don't circumvent a similar 
"beating the FTSE-100 strategy" but I don't think one can be found with the 
elequant simplicity of the O'Higgins formula. So anyone any ideas on how to 
proceed from here?