It combines gains by picking value stocks with the higher volatility of cheaper stocks. The Fool modified by dividing by the square root of price, but the concept is the same. There's a lot of doubt as to the current applicability of the strategy. The fact that it has been underperforming the Dow over the last few years has shaken confidence. Even the Fool wonders whether itshould be persued.
Dividends are out of favor compared to stock buybacks.
I've noted that even the dividend paying stocks have stopped increasing dividends. It's been a stabilizing influence on my portfolio, but has not contributed to gains. Even the creator of the strategy doesn't think it works in the current market. Personally, . . . this question is of more interest to me. Basically, with this system you are betting you can time U.S. interest-rate movements by assuming that the price of gold will work as an inflation predictor in the future in the same way, and with the same timing, it has in the past.