Book Review: Trouncing the Dow

The results are in on my 8-year survey of the investment method that is in the book Trouncing the Dow by Kenneth Lee. As with most investment books, there is the promise of rich rewards if you follow the author's secret to investment success. The only problem is that in order to really know if an approach is useful you need to see how the process would work over an extended period of time. Upon buying any investment book, it is impossible to find meaning in what the book contains. After years of passive study Trouncing the Dow proves to be a book that is worth examining.

Naturally, this book drew my attention because of its focus on the Dow Jones Industrial Average. By choosing stocks that are in the Dow Industrial average, Lee is trying to convey the idea that quality should be a priority when deciding which stocks to buy. However, the strength of this investment approach is found in the author's ability to recognize that stocks cannot and should not be held for the "long run." Instead, Lee says that, after determining the price range for a particular stock, you would consider buying at the low and selling at the high end of the range.

In theory an investment approach either works or doesn't. However, there is the real world to bear upon the actual outcome of any investment style. In the case of Trouncing the Dow, I have the benefit of starting my analysis in the middle of major bull market correction in May of 2001. This starting point takes away the illusion that all stock will go up forever as demonstrated by the Dow Industrials falling 37% and the NASDAQ falling 70% during the period from January 2000 to September 2002.

This review was done as a real-time experiment rather than an investigation based on looking back (backtesting) on what the performance would have been. From May to December 2001, I started my investigation of the benchmark investing method using 19 companies that were on my list for possible investments. As mentioned earlier, the benchmark method indicates what the range of a stock price should be in order to buy or sell. Trouncing the Dow uses Value Line Investment Survey as the sole source for deriving the data necessary to come to a conclusion.

Because there is no such thing as a perfect approach to investing, I consider a successful approach one that gets me close to the high and the low price but above the range on the downside and below the range on the upside. If a stock was predicted to reach a high of $45 but peaked at $40 then there is no value in that prediction since I would have been waiting for a price that never materialized. Conversely, if the prediction was that the stock was supposed to reach a low of $10 but only went as low as $12 then I would have never considered buying the stock until it reached $10 therefore this would have been considered a false or inaccurate prediction. Some stocks that had a predicted low of $10 but actually hit bottom at $8 were considered accurate and an acceptable trade-off given the fact that the selected stock paid a dividend compensating for the wait on the way down and up. In general my findings about this investing approach are as follows:

First, the accurate observations (11/19):

• The average decline after the predicted low was 22%
• The largest decline after the predicted low was 47%
• The smallest decline after the predicted low was 12%
• All 11 stocks exceeded the predicted high price, in some cased by 3 times
• Prior to 2001, 9 of 11 stocks had a history of increasing the dividend every year for the last 10 years

The inaccurate predictions (8/19):

• 1 company filed bankruptcy
• 1 company was bought
• Prior to 2001, 2 0f 8 stocks had a history of increased dividends
• Benchmarking was way off the mark when predicting transportation companies
  
  

In a proposition that is 50/50 in terms of the outcome, Trouncing the Dow method seems to be an effective way to increase the odds in your favor. Again, I only considered the benchmark approach to be effective if the stock price went below the predicted low. Why? Because we're only interested in what the worst case scenario is or might be. The upside will always take care of itself.

Combining the benchmark method, in Trouncing the Dow, with the non-banking companies in the Dividend Achievers Index may be an effective way to increase the quality of the stocks you choose to buy as well as when you decide to buy the stocks. I recommend that you at least check the book out at your local library and apply the approach to the non-financial components of the Dow Jones Industrial Average. Keyword search the title of the book and you'll find plenty of backtested analysis for this investing approach all over the internet. Touc.