The Daily Dow
Wednesday, March 27, 1996
by Robert Sheard

LEXINGTON, Ky. (Mar. 27): Comments by Fed Chairman Alan Greenspan about the apparent strength of the economy (and fears of creeping inflation) pressured the Dow today, sending the market low enough in the last hour of trading for program-trading curbs to kick in. Overall, however, it was a bit of a light news day for the Foolish Four.

3M announced an alliance today with KNOGO North America <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:KNA)") else Response.Write("(AMEX:KNA)") end if %> to provide universal asset protection to libraries across North America. KNOGO will be able to distribute all 3M library products (3M Tattle-Tape Security Strips, detection systems, 3M SelfCheck System hardware and software, and other 3M library materials flow management products) to public, academic, special and government libraries under the new agreement. 3M will provide service and installation for all new and existing KNOGO library customers.

In other Foolish Four news, DuPont Luxembourg announced that it will invest an additional 2 billion Luxembourg francs in its Mylar unit near the city airport. The investment means a fifth production line for ultra-fine Mylar foil used in condensers.

An interesting question pops up from time to time in the Dow folders concerning the tax implications of the Dow Approach versus a simpler buy-and-hold approach. Is it really better after taxes to use the Dow Approach and pay taxes more often?

Let's look at both options side-by-side.

The Foolish Four Approach has averaged 22% annually (pre-tax) for the last 25 years. Let's take a $10,000 investment in the Foolish Four and pull out 28% taxes each year for 25 years. (This assumes a 100% portfolio turnover each year, which, of course, doesn't happen, but we'll set the bar high for the sake of argument.)

At the end of 25 years, the $10,000 will have grown to $394,879.

Now let's look at a buy-and-hold forever approach, delaying taxes until the very end. The problem in the argument that this approach is better is that those putting the idea forth assume one can get the same return simply by holding a good blue chip stock forever. But as Michael O'Higgins demonstrates in BEATING THE DOW, this isn't the case. For most of the blue chips stocks, an average of 15% annually is a decent return over 25 years, given the ups and downs all stocks go through.

Take the hypothetical $10,000 and put it in a buy-and-hold strategy at 15% a year for the same 25 years and the total portfolio is worth $329,190, less than the Foolish Four approach and we haven't even accounted for taxes yet! By the time the government takes its cut, even though you've delayed it for 25 years, the portfolio is only worth $239,817.

So, don't sweat the taxes because you're paying them more often. Given the two options, your long-term growth is still better with the annual updates to the Foolish Four than with buying-and-holding, unless you know of a stock guaranteed to grow 22% a year over the next few decades! Fool on!

Transmitted: 3/27/96

Today's Dow Numbers

THE FOOLISH FOUR (3/27/96)  

           Day    Week    Month  Year  History
Fool-4   -0.34%   0.69%   2.45%  8.54%  8.54%
DJIA     -0.78%  -0.18%   2.57%  9.95%  9.95%
S&P 500  -0.62%  -0.26%   1.32%  5.35%  5.35%
NASDAQ    0.51%  -0.76%  -0.56%  3.97%  3.97%


Rec'd    #   Security  In At   Now   Change

1/2/96  142  DuPont    69.88  81.25  16.28%
1/2/96  380  Chevron   52.38  57.13   9.07%
1/2/96  148  E. Kodak  67.00  72.00   7.46%
1/2/96  149  3M        66.38  65.00  -2.07%

Rec'd    #   Security     Cost       Value     Change

1/2/96  142  DuPont    $9,922.25  $11,537.50  $1,615.25      
1/2/96  380  Chevron  $19,902.50  $21,707.50  $1,805.00      
1/2/96  148  E. Kodak  $9,916.00  $10,656.00    $740.00     
1/2/96  149  3M        $9,889.88   $9,685.00   $(204.88)    

      CASH        $682.44       
      TOTAL    $54,268.44         



Transmitted: 3/27/96

      
      

      
      

        

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