All Stocks are Not Created Equal
A report in the Saturday edition of the Wall Street Journal reviewed the 30 stocks of the DJIA that have now reached the cumulative 17,000 milestone, and how they have fared since the average hit 16,000 on November 21, 2013. The overall average was up 6.6% for the period, a decent return over the past 7 months. Averages, however, can be misleading. In this case, 13 stocks had returns above 6.6% and 17 had returns below 6.6%. Of the 17 below 6.6%, seven of them were in negative territory! This means that 23 stocks in the DJIA were up, even if only slightly, and seven were down.
To achieve this average, you needed some stocks to perform at a very high rate. Caterpillar, for example, was up 35.3%. When coupled with Walt Disney, up 24.2%; Intel, up 23.4%; and Merck, up 21.8%, these four stocks alone accounted for 3% of the rise in the average of 30 stocks. You can also see from this information that stocks that had fared poorly in the past did much better during this period. If you used the assumption of the “Dogs of the Dow” you would now look at the stocks that did the worst during this period and expect them to have the largest gains in the next period. The four worst performing stocks were: Proctor and Gamble, down 5.5%; Pfizer, down 4.5%; Wal-Mart Stores, down 3.9%; and Boeing, down 3.3%. But there is no evidence that these four will, in fact, outperform the other 26 stocks of the DJIA. All of this goes to prove the rule that the most important thing an investor can do is to diversify.
Successful investing doesn't happen by chance!
July 7, 2014 12:30PM