One Expert’s Way to Beat the Dow

One Expert’s Way to Beat the Dow

The strategy outperforms the market almost every year

There may be no sure-fire way to beat the market, but there is a strategy that comes convincingly close, author with Michael B. O’Higgins of Beating the Dow (Harper Perennial, 1992), suggests this system. At the beginning of the year, buy the 10 stocks out of the 30 Dow Jones industrials with the highest yields, often an indication that they’ve been labeled losers. (Calculate the yield by dividing the annual dividend by the stock price). Hold the stocks for one year and then repeat the process.

Sounds simple, but over the past 20 years, the strategy would have netted a handsome average annual 19 percent return, including dividends, compared to 14.3 percent for the Dow 30-stock average. The strategy has outperformed the Dow Jones Industrials for 17 of the past 22 years.

Downes suggests you budget at least $1,000 for each stock. By buying the individual stocks on your own, you can save the $450 or so it would cost to set up a $10,000 portfolio with a discount broker. Adjusting stock picks at the end of the year usually is not costly because typically more than half the stocks will remain on the list from year to year.

A Jamaican Beach. Photo by Elena

You also can buy the bargain 10 through unit trusts, which are sold through brokers such as Merrill Lynch, Smith Barney, Prudential Securities, and so on. The units are called the Select 10 portfolio and typically come with a 1 percent initial sales charge and 1.75 percent annual fee. The minimum purchase: $1,000 ($250 for individual retirement accounts). The trusts are liquidated each year, so to avoid capital gains taxes, you may want to hold on to them in an IRA.

A final tip: Investing in the cheapest five stocks of the ten highest yielders give you an extra kicker. Why? Because lower-priced stocks tend to move in greater percentage increments than higher-priced stocks and get better returns – even in grit-your-teeth years like 1994.

Investing in Oils

Investing in Oils

A study shows that investing in paintings can be unpredictable indeed

Oil paintings can be a good investment – problem is, they can also be a rotten investment. Knowing the difference means knowing a lot about what makes buyers, critics, and auction houses tick. And even then, the market can be unpredictable.

In Art Auction Trends, James Coleman compared the investment value of selected artists’ works to the consumer price index and the Standard & Poor’s 500. Between 1971 and 1991, 68 percent of the artists studied by Coleman kept pace with inflation and 54 percent outperformed the S&P 500. Sounds good – but how do you tell if your favorite artist is in the winner’s circle?

It’s hard. Consider the work of the highly regarded American impressionist Mary Cassatt. Her work was a good investment over the long run, but its value declined steadily throughout the 1970s. Despite a brief spike in 1981, the median price for Cassatt’s watercolors and drawings by 1984 had dropped well below the increase in the consumer price index and the stock market, and almost below the median price for her work sold in 1971.

Collectible Locks. Just collect what you like! Illustration: Megan Jorgensen (Elena)

Nonetheless, those who stuck to their guns made a killing when the median price for her work skyrocketed four years later, surpassing the increase in the CPI and nearly tripling the rate for the S&P 500.

How does one find stability in such a market? A painting’s ability to survive in a recession without a big price drop is a good sign of stability.

Better yet, just collect what you like. That way, you can ride out the bad times in good company.

An Artful Guide for the Artless

An Artful Guide for the Artless

Starting an art collection means dealing with dealers. Here’s how

The art world can be confusing place for even the most experienced of art buyers. Squishy factors as “historical interest” or “artistic integrity,” will determine whether your purchase is the bargain of lifetime or just expensive wallpaper. And if you’re just starting out, you’re at the mercy of the judgement of experts.

To even the odds, we can advise the beginning art collector. Here’s what we suggest:

Make sure that what you want is there to collect, and then collect the best in the field. If you want to collect Vincent Van Gogh paintings, you have to have a lot of money, or you will get the worst of the worst of what Van Gogh ever did, because that’s what’s on the market. To find out what’s out there, talk to dealers about finding other dealers in the same field, turn to international directories of dealers, or place ads in trade papers.

Establish as wide of a range or resources as possible. Not only will you see and learn more, but you’ll also be able to play the market for the best price and make intelligent price comparisons. There’s a difference between purposely playing dealers off one another – you shouldn’t do that – and asking intelligent questions. It’s like comparing cars at auto dealerships. You should ask dealers to explain why you saw something similar somewhere else for a different price.

Start by collecting an artist`s typical work. It’s a question of stability down the road – if you want things that will be liquid, you’d be well advised to go with the mainstream. At first you’ll want to find out what the artist is most famous for. Or if you like landscapes of Cape Cod, say, find out what people collect them like to have in them, and then you look for that in your pictures.

Artful Guide. Photo by Elena

Don’t confuse the work with the environment. Properly lit and displayed, even a sack of trash can look great. You can take anything – a tape measure, a can of soup – and put it up on a pedestal, light it, put it in an art gallery and you’re going to have people walk by and say, “wow that’s fantastic.” But when you get it home, all it is, is a can of soup. Take it out of the gallery environment, take it home on approval for a week. Usually you leave some sort of deposit, with no commitment to buy. On the other hand, unless you’re really experienced, it can be hard to see how beautiful something can be. At a garage sale it may look like a piece of junk, but a collector who knows what he’s doing will clean it up and display it properly and it’ll look like a million dollars.

Don’t take bulling. If you’ve got an art dealer who’s giving you a hard time, leave. When you get stuff like “The artist is almost dead” or “We sold six of these last month for X dollars,” just get out. If you feel pressure in any sense to do something, that’s a warning sign that you’re in the wrong place.

Start by working with the experts. Avoid galleries without direction of focus. These are good places to go for experienced collectors because chances are something’s going to slip through. But galleries like that are repositories for whatever people who are running around the area happen to find at flea markets and estate sales – the only focus they have is getting things they can mark up and sell for more. Those galleries have their place, and if you have experience, you can find bargains there.

Don’t ask, don’t tell. Forgeries are a touchy area, because you don’t want to call in one dealer to comment on another’s painting – that would be a conflict of interests – he would rather sell you one of his paintings. As you spend more time collecting, try to meet people – museum people or scholarly types, real true collectors who are not overly concerned about the money and who will give you a straight dope. If you recognize a forgery, don’t point it out. You can get involved in legal problems and you can make enemies fast.

Don’t let investment factors weigh too heavily. Art is immediately liquid only if you want to take a severe hit. If you buy and sell stocks and bonds and the like, you normally pay a 1 to 2 percent commission. If you pay a 20 percent commission to buy a work of art and then pay a 20 percent commission when you sell it – and those are very modest commissions in the art world – the art has to increase in value 40% before you see your first penny of profit.

Don’t try to chisel on prices, unless you have a really good argument. You shouldn’t worry about letting on that you really like a painting. A poker face won’t work anyway. If you are the type of person who likes getting a deal, dealers will bump their price up a bit when they see you coming, and then drop it down to what they wanted to sell it for in the first place. Or, worse, they’ll just sell you medium quality art that they would rather have out the door anyway. Sure they flex on the price a little bit, but you are not going to get the good stuff. You have to work for that – there`s a lot of competition.

Art Collection. Photo by Elena

The Small Print on Prints

They decorate a wall, but stocks do a better job of decorating a portfolio

Most art forms defy financial analysis because each work is highly individual. Prints are a different case because they generally are created in batches of 50 or 100. A 1993 study by University of Toronto economist James Pesando took advantage of this uniformity by analyzing the sales between 1977 and 1992 of 27, 961 prints by 28 modern artists, including Picasso and Matisse.

The results were not encouraging. The mean return for the prints was 1.51 percent annually, whereas a low-risk government bond would have gotten you a 2.54 percent return. Wily investors can still make a killing – annual returns on the prints ranged from a disastrous -35.34% to a healthy 47.18 percent. The method? Similar prints sold within a few weeks of each other varied in price by as much as 30 percent

The Perfect Portfolio

The Perfect Portfolio

A twelve-step program to get your investments to meet goals

Deciding to invest for your future is the easy part. Picking the right mix of stocks, bonds and short-term money market accounts is more taxing. Fidelity investments, the huge mutual fund company based in Boston, has come up with a simple quiz to help you find that mix. Called FundMatch, the test asks 12 questions about your finances, your needs for the future, and how aggressive an investor you are. The total will suggest the mix of stocks, bonds and short-term instruments right for you. Note that the test is designed for those who plan to invest for more than two years. Fidelity suggests you consider only short-term bond or money market funds, regardless of your store.

1. What portion of your total “investable assets” – the dollar amount of the investments you currently have – will this investment represent? The percentage of your portfolio that this investment represents can make a difference in how conservative or aggressive you may want to be. Do not include your home or vacation house in calculating investable assets.

Answers and points

Less than 25% – 6

25% to 50% – 7

51% to 75% – 3

More than 75% – 2.

2. Which one of the following describes your expected future earnings over the next five years? Assume inflation will average 4 percent. If you are expecting significant earnings increases, you may want to invest more aggressively.

I expect my earnings will far outplace inflation (due to promotions or a new job) – 5

I expect my earnings increases to stay somewhat ahead of inflation – 3

I expect my earnings to keep pace with inflation – 2

I expect my earnings to decrease (due to retirement, part-time work, or some other reason) – 1

Perfect Portfolio. Photo by Elena

3. Approximately what portion of your monthly take-home income goes toward paying off installment debt, such as auto loans, credit cards, etc., but not including a home mortgage? If a large portion of your income goes toward paying debt, you may want to have cash available for emergencies.

Less than 10% – 8

10% to 25% – 6

25% to 50% – 3

More than 50% – 1

4. How many dependants do you have? Include children and parents you support. If you have ongoing family obligations, you may need to be more conservative.

None – 4

1 – 3

2 or 3 – 2

More than 3 – 1

5. Do you have an emergency fund, that is, savings from three to six months’ after-tax income? Such a fund helps protect against the unexpected, such as a job loss. Without this reserve t tap, you may want to invest more conservatively.

No – 2

Yes, but less than six months or after tax income – 6

Yes, I have an adequate emergency fund – 8

6. Do you have a separate savings plan to cover major expenses, such as college tuition, home down-payment, repairs, etc.?

Yes, I have a separate savings plan for these expenses – 8

I do not expect to have any such expenses – 6

I intend to withdraw a portion of this new investment for these expenses (answer question 12 accordingly) – 5

I have no separate savings plan for these expenses – 2

7. Have you ever invested in individual bonds or bond mutual fund? How comfortable you are with different risks can help you determine how aggressive or conservative you want to be.

No, I would be uncomfortable with the risk – 1

No, but I would be comfortable with the risk – 9

Yes, but I was uncomfortable with the risk – 2

Yes, and I felt comfortable with the risk – 10

8. Have you ever invested in individual stocks or stock mutual funds?

No, I would be uncomfortable with the risk – 1

No, but I would be comfortable with the risk – 15

Yes, but I was uncomfortable with the risk – 3

Yes, and I felt comfortable with the risk – 16

9. Which one of the following statements describes your feelings toward choosing and investment? You should balance the comfort level you choose with your desire to attain your investment goals.

I would only select investments that have a low degree of risk associated with them (i.e., it is unlikely I will lose my original investment) – 2

I prefer to select a mix of investments with emphasis on those with a low degree of risk and a small portion of others that have a higher degree of risk that may yield greater returns – 5

I prefer to select a balanced mix of investments – some that have a low degree of risk, other that have a higher degree of risk that may yield greater returns – 9

I prefer to select an aggressive mix of investments – some that have a low degree of risk, but with emphasis on others that have a higher degree of risk that may yield greater returns – 12

I would only select an investment that has a higher degree of risk and a potential of higher returns – 16

10. You could increase your chances of improving your returns by taking more risk, would you:

Be willing to take a lot more risk with all your money – 16

By willing to take a lot more risk with some of your money – 12

By willing to take a little more risk with all your money – 10

By willing to take a little more risk with some of your money – 5

Be unlikely to take much more risk – 2

11. How long can you tie up this money? Your time frame is critical to your investment strategy. Stocks outperform bonds and short-term investments over long periods. The longer your money can sit and take advantage of market cycles, the more aggressive you may want to be. In approximately how many years do you expect to need the money you are investing?

2-3 years – 5

4 – 6 years – 25

7 – 10 years – 40

10 – 15 years 45

More than 15 years – 50

12. Do you expect to withdraw more than one-third of the money within 10 years? (For a home purchase, college tuition, or other major need?)

No – 50 (If yes, when do you expect to withdraw from the account?

Within 3 years – 5

4 -6 years – 30

7 – 10 years 50

Total score for all 12 questions:

Score: 0 – 75, Capital preservation portfolio. Short term – 50%, bonds – 30%, stocks – 20%.

Score: 76 – 132, Moderate portfolio. Short-term – 20%. Bonds – 40%. Stocks – 40%.

Score: 133 – 179, Wealth-building portfolio. Short-term – 5%. Bonds – 30%. Stocks – 65%.

Score: 180 or more, Aggressive growth portfolio. Stocks – 100%

A Distant Affray

A Distant Affray

By Roger Ormerod (excerpt)

… He asked, then, where I was calling from. I explained that it was a weekend course at an adult residential college. He asked how far away and I told him just over a hundred miles, and he said just as well but he didn’t blame me, and was it a dirty weekend? I said it hadn’t worked out like that, so far, but there was still time. One has to pretend to a certain amount of nonchalance in these situatons, don’t you think? But really, I was too exhausted. We hung up as friends.

This was not the end of it, but fortunately no more phoning was involved, as I was running out of change. I don’t know whether you noticed, sir, but I was missing for a large part of Saturady evening. The local police sent a car for me, and they ran me down to the station. Another inspector. Wales has some veery pleasant policmen, I find. We chatted. He explained that my wife was at that moment in custody, charged with grievous bodily harm inflicted with a deadly weapon, to wit, one shotgun. I had to admit that I’d forgotten to mention I owned such a weapon. He tutted a little, shaking his head, then told me that Madge was expected to recover, but the word was, from the hospital, that Colin would have no future practical use for his cottage. He raised his eyebrows at me and asked me whether she was usually that violent.

I shook my head. My opinion, which I expressed, was that some things must have provoked her, though I couldn’t imagine what that might have been, but the circumstances hadn’t been normal, had they?

Distant Affray. Photo by Elena

He cleared his throat and said no, they weren’t normal for Wales – men shooing one woman out of their bed just in time to take another woman to their cottage. Not in Wales. I detected a certain amount of envy in his voice.

I asked for Jason. He was being cared for by the lady next door on the left, I was assured. That would be Tina, a most attractiv widow with a sense of humour.

My wife phoned this morning. She is out on bail and staying at a quiet hotel, for her nerves. Tina is taking some of her things along and will tell her I’ve recovered from the experience. My wife tells me she has seen a solicitor about divorce proceedings, and doesn’t expect me to contest it. She sounded doubtful and tentative, but I’m sure Tina will encourage her to accept that divorce is the best solution. I’m to have have custody of Jason.

(Ellery Queen, Mystery Magazine, September 1993)

distant_affray