Mechanical Investing – Can It Make You Money?

I came across mechanical investing a number of years ago through exposure to the Motley fool . Within their books, they talked extensively about an investing strategy they called the Foolish Four. The Foolish Four was essentially a version of a strategy outlined in the book, Beating the Dowby Michael O’Higgins.

The strategy works like this:

1) Of the stocks that currently make up the Dow Jones Industrial Average, sort them by dividend yield and select the 10 highest yielding ones.
2) Sort these 10 stocks by price and buy the 5 lowest priced ones.

That’s it – pretty simple. There are a million different variations on this strategy, and the Motley Fool’s was also a bit different. Some variations ignore the highest yield and lowest price stock. Some strategies have you invest in all 10 of the highest yielding ones. The key element in all of them is that they rely on an investors laziness to find that one strategy that will involve little skill and effort to turn them into a millionaire overnight.

I tried to get some definitive statistics on the performance of these Beating the Dow strategies, but I got the total feeling that depending on who was doing the research depended on what the results looked like. Some sources were incredibly upbeat about its performance while others went off on how all this strategy is is a data mining exercise and should not be considered an effective strategy. To be honest, I did not know what to think.

I eventually fell back on that old adage, “If it seems too good to be true, then it probably is.” The Beating the Dow strategies basically try to take the guess work out of investing. Without solid empirical background, then I don’t think it is much more different than throwing darts at a list of stocks to determine what to invest in. I think this is a close to gambling in the market that you can get.

I think a potentially better way to use these strategies would be to use them as a starting point for generating investment ideas. Run the screens and then do some due diligence on those stocks to find ones that meet your criteria, whatever that may be. With that, at least you have not left everything to chance and can take some ownership in your decisions.

P.S. If these screens really interest you, then a good site to check out is Dogs of the Dow .