Book Review: Charles B. Carlson's, 'Winning with the Dow'

by: The Curious Investor

I read Winning with the Dow’s Losers by Charles Carlson years ago, but haven’t really thought about it until recently. As you might guess, this is basically a book about the 'Dogs of the Dow' strategy first publicized by Michael O’Higgins in his book, Beating the Dow. O’Higgins claims to have discovered this strategy in 1970s after being burned by the “Nifty Fifty” during the bear market in 1973-1974.

For those that don’t know, the strategy is basically a simple contrarian strategy that limits the stock picking universe to the Dow Jones Industrial Average (DJIA). The idea being that the Dow Jones will do the heavy “due diligence” for you since you can be generally sure that a company included in the DJIA is one of America’s largest and most steadfast corporations. As such, people who ascribe to a ‘Dogs of the Dow’ philosophy believe that you can outperform the Dow simply by buying some set of the worst performing Dow components. O’Higgins advocated choosing the ten Dow stocks with the highest dividend yield and rebalancing yearly.

Charles Carlson takes this O’Higgins’ theory one-step further in Winning with the Dow’s Losers. He believes that you can beat the Dow on capital appreciation alone simply by looking for stocks with the largest percentage drop in share value or trading furthest below their 200-day moving average which he defines using close ratio (share price to 200-day MA). The majority of his book involves the presentation of back testing data going back to the 1930s including analysis of companies, which have been added and subtracted from the Dow Jones. To follow up on his assertions, Carlson has even set up a website - - where he provides yearly analysis of Dow losers and tracks their performance.

In the end, it’s hard to say that this strategy is fool proof. In fact, if you look at the performance of the strategy over the last year, you’ll find that nearly all configurations of the Dow Underdogs strategy vastly underperformed the Dow. Furthermore, Carlson’s book itself, presents that the 10-stock strategy barely outperforms the Dow over the last 70+ years with outperformance just north of 100bps better than the Dow itself. And, would anyone really be bold enough to commit the majority of their capital to a strategy that relies on just three or five Dow components? These strategies seemingly offer better performance, but significantly more volatility over the same period.

Overall, Winning with the Dow’s Losers is a well-written book that presents a pretty effective case for a so-called “lazy strategy” that has the potential to outperform over a long period of time. I think its real value is getting the reader to think more about the value of “contrarian” investing and realizing that today’s losers will not necessarily be down and out, forever. The key, though, is not to confuse this strategy for a true value strategy. In the end, Carlson relies more on technical concepts like mean reversion and relative performance to prove that his strategy can beat the Dow. Furthermore, the strategy, as any “lazy strategy,” suffers from the fact that it prescribes a yearly rebalancing when market cycles are not bound to any predetermined time frame. One of the reasons why the strategy underperformed so badly last year is exactly this. Two of the Dow’s biggest losers in 2007, GM (NYSE:GM) and Citigroup (NYSE:C), were at the center of the downturn that has only accelerated in 2008. Will these two stocks someday rise from “worst to first” – possibly, but from 2007 to 2008, they went from worst to worst-est. Speaking of which, it would be interesting to see how this strategy performs on a dollar cost averaged basis.