Saturday, September 29, 2012

Plain vanilla Dow Theory? Or does Dow Theory come in many flavors? IV and final

 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. 


The Dow Theorist

No comments:

Post a Comment