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(More customer reviews)The 1990's have brought a striking popularity in books that promise outsize returns based on simple formulas. The most obvious example of the genre is the Dow Dogs strategy. Made popular by Michael O'Higgins and Jim O'Shaughnessy, among others, underperformance in recent years has done little to dampen investor enthusiasm.
Kenneth Lee's Trouncing The Dow offers a new twist on betting the undervalued Dow stocks theory. Employing a methodology he dubs benchmark investing, Lee seeks to establish price ranges using historical return on equity and price/book value figures. Once established these price ranges are used to establish concrete reference points the investor can use to consistently focus on undervalued stocks. The book has tables of the calculations from 1973-96, allowing those so inclined to compare current valuations with past Dow results under most market conditions. The process also forces the reader to dig into a company's fundamentals and get a feel for how it has been priced in the past.
The appeal here is obvious. A concise method for divining value on a select group of non-volatile stocks where information is readily available. (Lee suggests using The Value Line Investment Survey). The mechanical process eliminates emotion from the equation, allowing the reader to use history as a guide when uncertainty has gripped the market. The fact that Lee stresses low turnover, eschews market timing, and adheres to popular value tenets puts the ideas here on the same wavelength as studies produced recently in books by Jeremy Siegel and Jim O'Shaughnessy. Personally however, when I see strategies based on Dow stocks I tend to want to see computer studies based on similar stocks. I want to see large samples. They give the picture texture and background, they help point out any possible flaws or reasons for concern. Back testing has its limitations. Early on Lee states he originally developed the formula employing the Value Line universe on a computer. In fact, the current configuration of Value Line's electronic product makes Lee's process relatively easy to implement on a broad scale. To include summaries of the results of that data would have added considerable weight to his argument.
It seems to me that the real question here is whether anomalies pointed out here and popularized by O'Higgins and others will continue to outperform. Indeed, many of the ideas here overlap with popular titles of the last few years. Is the Wall Street establishment so short-term focused that long-term value plays based on simple rules offer an easy short cut? Though many would like to deny it, there is enough efficiency in the United States equity markets to make outperformance a relatively difficult task. Though the idea of "beating the experts" without complex strategies makes a cute media story, it continues to be a tall order.
In Trouncing The Dow, Lee makes the case it can be done. The book is a quick read and offers a formula that anyone can employ to make up his or her own mind.
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Insights on value investing from a Wall Street superbroker. From 1973 to 1997, the stock market averaged 9% return. Kenneth Lee's "Benchmark Investing" averaged 24%. Value investing may be a hot topic on Wall Street right now, but Lee has been making money with it for nearly a quarter-century. Troucning the Dow, Written in an easy-to-understand style, is packed with step-by-step instructions that show any investor how to be a winner. With returns that rival Warren Buffett and Benjamin Graham, Kenneth Lee carves out his own spot in history with Trouncing the Dow.
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