Dogs of the Dow Again

OK, I get weekly updates on this particular strategy.  If you're not familiar with the idea, the dogs are the "worst" stocks within the Dow Jones Industrial average on any given year.  I postulated that the reason why the dogs "outperform" is because you're simply taking on more risk in the way of volatility. The idea here is that the DoD outperform the greater DJIA each year, but I assert that this is because the components selected are highly volatile. I proved it on several occasions within the last year when the market was tanking. I further asserted that the dogs would significantly OUTPERFORM when the market recovered and subsequently rallied up. Well, I wasn't entirely right this year. The larger DJIA is up 18.4% as of this writing. The dogs are up 10.9%.

So what does this mean? Well, my lesson learned here is that outperformance is interesting when put in the context of timeframe. I know our dogs haven't outperformed for the year, but I bet they've been up significantly during the upward swing. And as things have recovered, the dogs have probably outpaced the market as a whole, but this doesn't make up for how much they've fallen over the bad times. So when we take the dogs timeframe over the "bad" times and the "good" times we see that they're still lagging overall.

So what does this mean? To me, it means that limiting volatility is just as important as limiting losses. Each bear has a lesson to teach.