Saturday, 6 March 2010

Dogs Of The Dow

An article on the Yahoo Finance page today gives a good example of an investment “system” that worked, by some measure, for a while, but which ceased to work after a while for various reasons.

Some of you may be familiar with the "Dogs of the Dow" strategy, but basically the idea was to buy the top 10 highest-yielding stocks in the Dow Jones Industrial Average (of 30 stocks) each year, and sell them a year and a day later and start over.

The details of the strategy don’t really matter. What I really want to highlight is the importance of constantly monitoring any systems for signs that they may be losing their potency. Markets do change, and any inefficiency that you may be lucky enough to identify and take advantage of for a while, will almost certainly cease to exist at some point.

However, some methods might simply have a losing run due to statistical variance, something to be expected, so it’s important to recognise this possibility and not pull the plug or start changing something too quickly.

1 comment:

Edgehunters said...

Hi Cassini

I think you are correct about constantly monitoring your methods for signs of a degrading of any edge you may have.
However you are also correct about not being fooled by what could be just a result of variance.

I think that the trick is to get the balance right between both of the points you make. Which I believe is easier said than done.

One main tools we can use is by keeping extensive records.

Also using resources like the Adrian Massey site for horse racing to back test as far as possible can help.

Good Luck