In investment the simplest ideas are often the most compelling. Take the 'dogs of the Dow' investment strategy. It's straightforward, elegant, and wildly popular with American investors. The idea is that at the beginning of each year investors should look at the 30 stocks which make up the Dow Jones Industrial Average. For each of the index constituents they should divide its annual dividend payment by its share price to give the stock's dividend yield. Then they should simply buy the 10 shares with the highest dividend yield and sit back and do nothing for the rest of the year. According to the dogs of the Dow theory, their portfolio should outperform the index as a whole year after year after year. The rationale behind the strategy is straightforward. The idea is that the 30 companies that make up the Dow are the bluest of blue chips, widely held in the portfolios of both institutional and retail investors. As a result, they will endeavour to maintain constant dividend payments through thick and thin. That means if a blue chip's dividend yield is high, then its stock price must have been beaten down in the market, which implies it is at the bottom of its cycle and primed for a rebound over the next 12 months. As a strategy, the dogs of the Dow could hardly be simpler. Yet for many investors it ticks all the boxes. It is value-driven - followers only buy the cheapest blue chips. It is contrarian - they only buy the market's unloved 'dogs'. And it is cost-efficient - investors rebalance their portfolios just once a year, which cuts down nicely on transaction fees. As a result, quite a cottage industry has grown up in the US around the dogs of the Dow, with dozens of magazine articles and websites and even a couple of indices promoting the strategy. Now the Hong Kong market is going to the dogs, or at least it will if Morgan Stanley has anything to do with it. Equity strategists James Cao and Jerry Lou have tweaked the original idea to make it suitable for application to Hong Kong listed stocks, and have come up with a portfolio of 16 dogs they believe should outperform. The main change they have made to the original strategy is to reduce the period between portfolio rebalancings to reflect Hong Kong's shorter holding periods and the accelerated growth rates of the Hong Kong and China markets. Taking the constituents of the MSCI Hong Kong index as their universe of local companies, Cao and Lou say investors should buy the top six by dividend yield and rebalance their portfolio every four months. At the moment that would give you a portfolio headed by Hang Seng Bank and the Link Reit, with a yield of 5.8 per cent and 4.8 per cent respectively. For mainland companies listed in Hong Kong, investors should buy the top yielding 10 stocks from the combined H-share and red-chip indices and rebalance every two months. Right now, the list would be topped by Sinotrans Shipping with a yield of 7.3 per cent and Zhejiang Expressway, which has a dividend yield of 5 per cent. According to Lou and Cao, buying Hong Kong's top dogs would have returned some impressive outperformance over recent years (see the charts below). Following the strategy for locally-listed mainland companies would have returned 1,350 per cent since the bottom of the market during the 2003 Sars outbreak. Buying the indices would have returned just 359 per cent. That sounds like a compelling argument. Unfortunately there is a big problem with the dogs of the Dow strategy: it doesn't work. Whether you look back over 15 years, 10 years or five years makes no difference. Whichever period you choose, in the US the Dow Jones Industrial Average as a whole has comfortably outperformed a portfolio of its top ten constituents by dividend yield, rebalanced annually (and a portfolio of the top five come to that). The problem is that the strategy relies heavily on curve-fitting. When it was devised, its designers looked at historical market data and created a strategy that would have worked well during that period in the past. Cao and Lou have done much the same, playing around with different rebalancing intervals and different numbers of stocks until they came up with a portfolio strategy that would have generated handsome returns had they employed it at the time. In other words, this is a strategy designed for the past with all the benefits of hindsight. There is little to say it will work in the future. That doesn't mean the idea is completely useless. Buying cheap stocks is generally a good strategy, and a high dividend yield is one useful measure of cheapness. But investors should approach this pooch with caution. It may just bite.