But there are winning strategies applicable to large-capitalization companies as well. In the next issue we'll point out one ("Trouncing the Dow") that has a truly stellar record but which requires the investor to do quite a bit more homework.

Today, however, we are focusing on a couple winning variations of a high yield, low price stock selection approach developed by Robert Sheard (of The Motley Fool) in his book, The Unemotional Investor.

This technique is called "Unemotional Value." It is simplicity itself and, thanks to the internet, likely will only require about an hour a year of investor analysis and bookkeeping.

I should mention that this derives from the Dogs of the Dow methods cited earlier by Michael O'Higgins in Beating the Dow and The Motley Fool, but which later fell into disfavor as they became so popular they ceased to be effective as contrarian, or value-oriented, means to investor success. They also suffered by comparison with the huge surges in prices of technology and internet stocks in the late 1990s, when "extravagant exuberance" for momentum securities (having little or no intrinsic value other than the expectation that once one owned them some "greater fool" would buy them at a still more absurdly high price) prevailed.

Once I did, I invested $25,000 in the second of these approaches, placing orders for $12,500 (±$25) worth of stock each (after commissions) on 12/30/02 in Honeywell (HON) and J.P. Morgan Chase (JPM). Today (at the close of the market on 6/13/03), not quite six months later, including dividends, their combined market worth is up over 40%, to just above $35,000.

"Unemotional Value 4* (1961-1997 annualized return 18.20%)

Universe: 30 stocks in the Dow Jones Industrial Average

How It Works:

Step 1: Sort the Dow stocks in descending order of dividend yield. Keep the top 10 stocks. Keep this list handy for step 3.

Step 2: Sort the remaining 10 stocks in ascending order of price. [Larry's note: i.e. lowest priced of the ten at top, highest at bottom]

Step 3: If the top stock on both lists is the same (i.e., the highest yielding stock is also the lowest priced stock), discard it. Otherwise keep it.

Step 4: Buy the top 4 remaining stocks from the list in step 2.

Rebalance: Annually."

This variation had a standard deviation of 20.71% during the '61-'97 period analyzed in Sheard's book. It has the advantage of greater diversification but is likely to perform a little less well than the more volatile 2^nd U.V. method.

(*Source: Backtest Hall of Fame)

As of today (written 6/13), the following stocks meet the "Unemotional Value 4" criteria:

"Unemotional Value 2* (1961-1997 annualized return 21.67%)

[Steps 1-3: Exactly the same as above.

Step 4: Select the top 2 remaining stocks from the list in step 2.]

Rebalance: Annually"

This variation had a standard deviation of 25.84% in the '61-'97 period analyzed by Sheard. As indicated, for its likely greater total return it sacrifices diversification and so, in any particular year, may have wide swings up or down in value. This factor should probably not be taken lightly by the prospective investor. But for a certain percentage of one's portfolio this strategy could over the long-term provide a very good total return on one's initial investment.

As of today, the following stocks meet the Unemotional Value 2 criteria:

Second, in addition to the fact that past results cannot properly be used to predict future returns, back tested findings, i.e. things that look good when one selects for them in hindsight, are far less reliable as forecasters of statistical norms or means toward which markets generally return than are fundamentals of good business. It remains true that good value usually leads eventually to good prices. It is probably, but not necessarily, true that the Unemotional Value methods tend to focus the investor on companies offering good value. It is true enough, I think, to make such simple, unemotional strategies as these worthwhile.

Indeed, for quite easy yet disciplined large-capitalization stock strategies that help one buy low and (generally) sell high, provide excellent appreciation prospects, and offer dividend yields to rival those of bonds, it would be hard to beat Unemotional Value.

Nonetheless, if one is interested in a greater margin of safety and does not mind somewhat more in the way of research efforts, check with us next month for a very intriguing large-cap strategy alternative.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)