Ten Timeless Tips From 70 Years
A lot of the companies we cover hatched from humble beginnings. Dow Theory Forecasts is no different.
LeRoy Evans, who worked in the advertising department at a steel mill, had always taken an interest in economics and investing. At the suggestion of a friend, he began to share his views, rooted in the Dow Theory, in the mid-1940s.
Initial issues consisted solely of a market commentary and a list of suggested stocks. The earliest stock picks include some familiar names: AT&T ($43; T), Colgate-Palmolive ($74; CL), Kroger ($36; KR), and Union Pacific ($94; UNP). Individual stock reviews began appearing in 1950, and the Forecasts expanded to its current eight-page format in 1954.
Given the cyclical nature of the stock market, several themes have emerged again and again over the past 70 years. The following tips from our newsletter have stood the test of time.
Feb. 25, 1946
"Unfortunately, there is nothing in the Dow Theory that calls the tops and bottoms every time. If there were, the original Dow Theorists would have had all the available money years ago and there would not be any market. Often, but not always, the Dow Theory does give indications of danger at the beginning of secondary reactions."
Bottom line: Every investing strategy has its limitations.
April 23, 1954
"What has caused the most confusion in recent months has been the ability of the market to advance in the face of declining business conditions . . . In spite of much belief to the contrary, the market still moves in advance of business."
Bottom line: Stocks do not move in lockstep with the economy. Consider the most recent example: The market rallied starting in the spring of 2009, despite a sluggish economic recovery.
Sept. 16, 1955
"Many investors have missed the great rise in recent years because they based their conclusions only on the level of stock prices. But this is not the yardstick to use. The correct measuring stick is the level of prices in relation to earnings because when stocks are bought, earnings are bought."
Bottom line: The actual price of a stock is far less important than that price's relationship to earnings or other operating metrics.
March 22, 1963
"Since a stock may sometimes remain undervalued or overvalued for long periods of time before readjusting, investors should be aware of the possibility that potential profits can sometimes be missed by buying an undervalued stock at the wrong time."
Bottom line: Value investing can require significant patience.
Feb. 22, 1982
"Not only do important stock market moves tend to climb the wall of worry, but what is most widely assumed to be imminent rarely happens. Currently, investors are fretting over budget deficits, much higher interest rates, and the possibility of a depression. However, the economic landscape is littered with casualties of such widely assumed predictions . . . The last time high inflation was winding down and predictions of depression were widespread was in the early â€˜50s, and most investors know what happened then — one of the most dramatic bull markets."
Bottom line: There's no shortage of reasons to stay out of the stock market, especially at the onset of a bull market.
April 11, 1994
"Many advisers suggested last year that a 10% correction was possible in 1994 but that the year overall would be a good one for stocks. However, now that the 10% correction has occurred, it is growing increasingly difficult to find advisers who are even mildly bullish on the market . . . Pullbacks are part of all markets; and investors who exploit the opportunities that pullbacks present are usually those whose portfolios show the biggest long-term gains."
Bottom line: Be realistic about your risk tolerance and ability to avoid panicking in down markets. Selling on every minor pullback is a recipe for poor returns.
Dec. 20, 1999
"Most of us learned that smart investors buy low and sell high. In 1999, however, the way to make money was to buy high and sell higher . . . After several years of winning with technology and growth stocks, many investors are focusing only on potential gains and ignoring potential risks. When that psychology unwinds because of an unexpected event, the fallout is likely to be painful for the investors that now view price/earnings ratios and other valuation measures as outdated."
Bottom line: Investing fads may suspend, but will not displace, the usefulness of time-tested valuation metrics.
Oct. 8, 2001
"The stock market discounts; it does not review or reflect. Collectively, investors estimate future corporate cash flows, then discount those flows into present-day dollars. Investors' discount rate depends on their expectations for inflation and Treasury-bond yields, their confidence in cash-flow forecasts, and their tolerance for risk . . . Attributing market volatility to Wall Street's stupidity is among the most dangerous things you can do. On occasion the market will err, but more often than not the averages anticipate the future correctly."
Bottom line: Although a stock's price movement may seem mysterious at times, it can often be explained by investors adjusting their views on factors that affect cash flows.
Nov. 24, 2008
"In a business setting, the statement, â€˜He's all about results' is a compliment. But focusing entirely on results can be a mistake . . . A results-oriented outlook centers around attempting to duplicate the circumstances that preceded a positive result. The S&P 500 Index rose at least 19% in each of the five years from 1995 through 1999. A strategy of buying fast-growing stocks regardless of valuation worked well during much of that period. Of course, anyone who had money in the market in the spring of 2000 knows that such a strategy has a limited shelf life . . . At the Forecasts, we prefer a decision-oriented approach. Decision-oriented investors don't ignore results, they just expect that over time, superior decision-making will result in superior results."
Bottom line: Rather than chasing performance, we follow a rules-based process that uses the Dow Theory to gauge the temperature of the market and QuadrixÂ® to select stocks.
Jan. 27, 2014
"A dash of discomfort, I've gradually realized, tends to accompany my better investment decisions. Comfort comes at a price and often takes the form of lagging returns — from overpaying for assets already widely loved by the market to avoiding an investment priced for a disaster that seems unlikely to materialize. But that uneasy feeling of going against the grain can be compensated with higher returns."
Bottom line: Contrarianism may be temporarily painful, but it generally pays off for those with long time horizons.