This book's simple investment strategy is destined to replace "Dogs of the Dow" as a moneymaking winner for investors. 20 line illustrations.

Preface

ix

Acknowledgments

xiii

Author's Notes

xv

Introduction

xvii

PART I. THE CONCEPT-MEAN REVERSION AND CONTRARIAN INVESTING

1

(22)

1 Worst to First-Why It Works

3

(20)

PART II. THE TOOLS-THE DOW JONES INDUSTRIAL AVERAGE

23

(76)

2 Worst to First-Dissecting the Dow Jones Industrial Average

25

(16)

3 Worst to First-The 30 Dow Components

41

(58)

PART III. THE STRATEGY-BASIC AND ADVANCED WORST-TO-FIRST STRATEGIES

99

(68)

4 Worst to First-Basic Strategies

101

(22)

5 Worst to First-The Track Record

123

(22)

6 Worst to First-Advanced Strategies

145

(22)

PART IV. THE PORTFOLIO-PUTTING THE PIECES TOGETHER

167

(14)

7 Worst to First-An Important Piece of the Portfolio Puzzle

169

(12)

PART V. THE COMPETITION-DOGS VERSUS UNDERDOGS

181

(24)

8 Worst to First Versus Dogs of the Dow

183

(22)

PART VI. THE NAYSAYERS-POINT/COUNTERPOINT

205

(16)

9 Worst to First-Addressing the Critics

207

(14)

PART VII. CONCLUSION

221

(10)

10 Worst to First-The Future

223

(8)

PART VIII. THE HISTORY-TRACKING THE DOW COMPONENT PERFORMANCE

231

(2)

Appendix: Dow Components and Return Data-1930 Through 2003

233

(38)

References

271

(2)

Index

273

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Winning with the Dow's Losers
Beat the Market with Underdog Stocks

Chapter One

Worst to First -- Why it Works

... And the last shall be first.

I'm about to reveal to you an investment strategy that is so powerful yet so simple and logical that it will change the way you invest. Bold statement? You bet. But it's also true.

Indeed, by following this simple strategy, since the end of 1930, an investor would have turned a $1,000 investment into $2 million. That's roughly double the return of the Dow Jones Industrial Average over that same time frame. Of course, few of us have 74 years to invest. So let's look at how the strategy performed over shorter time frames:

Over the last 50 years, this investment strategy (which, by the way, requires you to took at just 30 blue-chip stocks, once a year) turned $ 1,000 into nearly $215,000, outperforming the Dow Jones Industrial Average over the same time period.
Over the last 30 years, this investment strategy (which makes all the investment decisions for you, including the always-difficult sell decision) turned $1,000 into more than $46,000 -- a gain of 4,500 percent on your investment and a profit that was 53 percent greater than the return of the Dow over the same time period.
Over the last 20 years, this investment strategy (which is so easy that you don't even need a calculator) turned $1,000 into more than $14,100 -- a gain of more than 1,300 percent, handily beating the Dow over the same time frame.
Over the last 10 years, the strategy (which is so inexpensive that your total "research" cost is the price of one Wall Street journal) once again trumped the Dow, more than tripling your money over that time frame.
Over the last 5 years, the strategy (which will take you less than an hour to research and can be implemented anytime during the year) produced a 67 percent return on your investment versus a measly 6 percent return in the Dow. And remember-that 67 percent profit occurred during one of the worst bear markets in history, when most investor portfolios and major market indexes were deep in the red.
And for 2003 (through June 30), this investment strategy (which requires less than $1,000 of investment capital) returned 27 percent on your investment, roughly three times better than the return of the Dow.

To summarize, this investment strategy has handily beaten the Dow Jones Industrial Average

Over the last 74-year period
Over the last 50-year period
Over the last 30-year period
Over the last 20-year period
Over the last 10-year period
Over the last 5 -year period
Over the last 4-year period
Over the last 3-year period
Over the last 2-year period
Over the last 1 -year period

And if you don't think the Dow Jones Industrial Average is a worthy benchmark to beat, consider this: The Dow Jones Industrial Average has whipped the S&P 500 Index, Wilshire 5000, Nasdaq Composite, and most other major market indexes over the last 5 years, as the following chart shows:

The Worst-To-First Phenomenon

Everyone's favorite investment mantra is "buy low, sell high." The problem is that nobody actually buys low and sells high. Rather, we buy high and (we hope) sell even higher.

The stock market is the only market on earth where the merchandise becomes more popular as it becomes more expensive. Why? Because investors feel comfortable staying with the herd when it comes to buying stock. After all, if everyone loves a stock and its price is rising, it must be worth buying, right?

The problem is that investing with the herd is a surefire way to lose money. Look at all the technology stocks that soared in the late '90s only to come crashing down in the last 3 years. Everyone wanted to buy those technology stocks when they were skyrocketing and trading at extreme prices; nobody wanted to buy them when they crashed.

Successful investing is all about forcing you to do the smart thing even when your emotions are telling you otherwise. And the smart thing to do as an investor is to buy low and sell high. Fortunately, strategies exist that force investors to buy high-quality stocks when they are down and to sell them when they are up. I call them my worst-to-first strategies.

These strategies emerged as a product of my research into the Dow Jones Industrial Average. As an editor of Dow Theory Forecasts investment newsletter and a money manager, I've been following the Dow for more than 20 years. During my research of Dow stocks, one theme that jumped out was how the Dow's losers in one year (that is, the Dow stocks showing the greatest percentage price decline for the year) became winners the next.

This worst-to-first phenomenon has been especially pronounced in recent years. For example, in 1999, the worst-performing stock in the Dow was Philip Morris (now called Altria). An investment in the tobacco giant lost a whopping 54 percent of its value in 1999. In 2000, however, the story was much different for Philip Morris shareholders. To say Philip Morris rebounded would be an understatement; the stock was the best-performing issue in the Dow in 2000, returning 105 percent. In fact, Philip Morris's triple-digit return in 2000 was nearly twice the return of the runner-up that year, aerospace giant Boeing. Even more impressive was that while investors were more than doubling their investment in Philip Morris in 2000, the Dow actually lost money (nearly 5 percent) during the year.

In 2000, same story, different players. The two worst-performing stocks in the Dow in 2000 were AT&T (down 65 percent) and software behemoth Microsoft (down 63 percent).

Winning with the Dow's Losers
Beat the Market with Underdog Stocks. Copyright © by Charles Carlson. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.

Excerpted from Winning with the Dow's Losers: Beat the Market with Underdog Stocks by Charles B. Carlson
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