Part IV. Recap and main tenets of my own “flavor”
Continued
from this post:
All in all: If you want the
best advice, follow both Russell and Schannep. Both are great Dow Theorists and
both are alive. Take advantage of it!
Is any one of the Dow Theory “flavors”
we have hitherto analyzed to be excommunicated from the Dow Theory fraternity?
Personally, I think that all of them loosely fit under what we can define the
basic Creed of the Dow Theory. Some styles place greater emphasis on the
secular trend and values; others focus on riding the primary trends and are
more technical in nature.
However, from the preceding
discussion we can see that it is important to know what kind of flavor we mean.
The investment results (and drawdowns to be endured) accruing to an investor
riding the secular (10-14 years) trend will differ substantially from those affecting
an investor following the cyclical bull and bear markets (whose median duration
is ca. 2.5 years). In another post, I’ll dissect the advantages and
disadvantages of each method. Here it suffices to say that, while not
disparaging any of such “flavors”, it is important to know were we stand and
what do we mean when we say “bull market under Dow Theory”. What is a bull
market: 3 months (secondary trend), 2 years (primary trend) or 14 years
(secular trend)? Our wording and definitions are important.
My conclusions are as follows:
·
There isn’t just one “right” or official Dow Theory.
·
There are some flavors which, provided they respect
the basic tenets of the Dow Theory are acceptable. Each “flavor” has its own
pros and cons and its use depends on the temperament and personal circumstances
of the investor (more on this in another post in this blog).
·
The basic tenets of the Dow Theory, which all acceptable
“flavors” have in common, are the belief in trends, the existence of primary
and secondary movements (even though there is some disagreement as to the
duration of each), the importance of previous highs and lows (although there is
also disagreement in determining which highs or lows are the relevant ones) and
the principle of confirmation for a signal to be valid. This is the basic
“Creed”.
·
Together with the acceptable “flavors” of the Dow
Theory co-exist real heresies which deny the basic “Creed”. Heresiarchs are
those that deny the principle of confirmation, that apply Dow Theory principles
to short term trading (as the main strategy), those that say that the
Transports should fell into oblivion, or those that bluntly say that the Dow
Theory doesn’t’ work any longer. As we advance in this blog I will expose some
of these adulterated dow theorists (with lower case). It is because of these
heresies that the real Dow Theory gets occasionally bad press.
·
My personal “flavor” of the Dow Theory is deeply
influenced by Russell and Schannep (and indirectly by Rhea). I define “primary”
and “secondary” movement very much in the sense of Rhea which results in
investments with an average duration of ca. 2 years. I keep an eye on values
and fundamentals but I’m extremely demanding as to what constitutes “good
values” and "useful fundamentals" (versus "funny-mentals") and extremely skeptical as to my ability (or anyone else’s, by the way)
to accurately determine “values”. More on “values” and fundamentals in a future
post. Borrowing from the world of trading and its obsessive quest to look for
the best risk reward ratio (RRR) trades, I place special emphasis in finding
good RRR investments. Risk must be commensurate with potential gain. All these
aspects are vital to succeed as an investor and will be further developed in
this blog.
·
However, I part company with Russell or Schannep in
that I rely exclusively on the Dow Theory to determine a buy or sell signal. I
don’t want to use extraneous black box indicators which, albeit useful, are not
endowed with the 112 years track record of the Dow Theory. I am convinced that, if
one is well prepared and works diligently, investment results can be more than
satisfactory by simply applying the Dow Theory. I’d rather prefer to be
proficient in just one thing (Dow Theory) than dabbling with many indicators.
All the articles concerning
this saga of “Dow Theory flavors” will be included in a new page named “Dow
Theory flavors”, since I think it is vital for the investor and Dow Theory
follower to know our premises and where we stand.
Sincerely,
The Dow Theorist
