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Stockstips: stock advice, stock market, investing, finance, economics, bonds, brokerage, dow jones
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Here's an explanation on how O'Higgins got the idea for BEATING THE DOW:
"I entered the investment business in 1971 as an institutional research salesman for Spencer Trask and Company, one
of Wall Street's oldest and most prestigious 'research boutiques.' My job was to convince banks, insurance companies, and
other institutional investors that our research analysts, by virtue of their experience, analysis and insight, could help
beat the Dow. If they liked my pitch, we signed them up for our highly regarded research service at a price of over $50,000
a year."
"In 1973 we were in a middle of a bear market. One day I sat talking with a bank investment manager I knew to be
something of a market guru. Spread out in front of him was his bank's 'approved list' a lengthy roster of top-quality common
stocks that had received his investment committee's blessing as suitable for an institution entrusted with public funds."
"An approved list is hardly where you'd go looking for excitement, but this respected professional had written something
in the margin that made me intensely curious. Reading upside-down, my eye caught a little square box he had drawn in black
ink...The little black box, he explained almost apologetically, contained nothing mysterious at all; quite the contrary.
It listed 30 of the most widely held and popularity followed stocks in the world-the 30 companies making up the Dow Jones
Industrial Average. 'If it were up to me,' I can still hear him saying, 'I would throw out the rest of the list and stick
just with the 30 Dow Industrials.'"
"I started spending nights and weekends on research. Eventually I concluded that by periodically applying a few
simple criteria to this small group of 30 top blue chips. I could achieve better results with less risk than the majority
of independent money managers and mutual funds with their complex investment strategies. And the idea that it could all be
kept simple suited me just fine."
Now comes the rule that summarizes O'Higgins' philosophies in a nutshell.
"Early in my career I made an observation about human nature and money - that people tend to complicate something
in direct proportion to its importance. I'm sure I'm not the first person to observe this, but it's been such an important
part of my life that as a private joke I call it O'Higgins' Law. O'Higgins Law helps explain why over two-thirds of professional
investors fail to beat the market averages even though they spend heavily on research, employ economists, follow hundreds
of companies, have sophisticated computer models and use techniques like program trading to try to enhance returns and limit
losses.
WHY THE DOW? O'Higgins explains:
"...the individual Dow companies have evolved in response to an ever-changing business environment. Their internal
dynamism, together with mergers and substitutions, has made the current Dow Jones Industrial Average representative of virtually
all important sectors of the American economy."
"Multinational without exception, the Dow companies in their different ways are positioned to benefit from current
megatrends-globalization of markets; cleaning up the environment; repairing the infrastructure; depletion of energy sources;
revival of manufacturing; increased literary rate; aging of the population; expansion of the free world."
"Most important, however, our discussions of the individual companies will examine the kinds of problems these stalwart
companies have encountered over the years - and solved. That even major corporations make mistakes and suffer from unforeseen
adversity is a fact of life and always will be. That the investing public will always overreact to bad news is just as certain.
The resilience the Dow companies have because of their immense financial, legal and human resources makes a portfolio of Dow
stocks a conservative investment risk."
"By virtue of sheer size and strength-call it raw staying power-blue chip companies tend to be survivors. The old
adage 'the bigger they are, the harder they fall' doesn't hold when you're talking about corporate giants. Blue chip stocks
are usually safer investments than other kinds of stocks."
"The investing public invariably overreacts to unfavorable developments. This creates special opportunities when
you're dealing with blue chips: bad news is good news because it makes strong stocks cheap."
"Contrary to popular belief, large institutional investors, who dominate market volume and cause sharp volatility
through program trading, have created more opportunities than disadvantages for personal investors."
"Many individual investors turn to mutual funds as a solution to volatility, but the funds are actually part of the
problem. Seventy-five percent of them fail to match, much less beat, the Dow and other market indexes. Their flexibility
is seriously constrained by size, competitive pressures, liquidity responsibilities and diversification requirements. Together,
these factors lower investment returns, increase transaction costs and necessitate trading practices that cause wide price
swings, many of which are merely technical."
"It's my conviction that the Dow Jones Industrial Average well represents the important segments of today's economy
and that its blue chip composition reflects a securities marketplace dominated by large institutional investors."
"The Dow's preeminence as a market indicator is therefore based as much on current realism as on long tradition.
But by virtue of its being in the world's most widely watched measure of the stock market, the Dow not only provides a reading
of the investor psychology driving the market but also influences the psychology that is likely to underlie its movement in
the future."
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