The Daily Dow
Thursday, June 5, 1997
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (June 5, 1997) -- I've always been a strong proponent of the Dow Approaches (still am, don't worry), but occasionally it's good to have your beliefs challenged. That happened today when a reader asked me to look at a plan where you buy the PPP stock each year and then hold it forever. Does it do as well as the regular yearly update model?

My immediate response would be that it shouldn't do as well, simply because buying and holding forever means you hold a stock through all its cycles good and bad. The theory behind the Dow Approach is that you buy the stocks low in their cycles and then rotate out of them after they've recovered. That way you're always buying low and selling high.

But I ran some numbers anyway, just to see if my belief was accurate. Let's look at the basic Foolish Four approach first. If you had invested $1,000 at the beginning of every year since 1989 and followed the Foolish Four each year (paying taxes of 28% on all the gains each year), your portfolio would be worth $19,744 now.

If you put that $1,000 each year into the current PPP stock (the second-cheapest of the ten highest yielders), however, and then paid the 28% taxes at the end (that is, now). Your portfolio would be worth $22,527.

Before you read too much into that, however, keep a couple of points in mind. I was only able to run this test for the last 8 years and 5 months. Earlier than that and you have to start calculating for spinoffs and mergers with Primerica. So the test is for a very brief time. Also, the off-the-scale performance for GOODYEAR TIRE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>, the 1991 PPP, skews the results quite a bit.

My suspicion is that the longer you hold the previous PPPs, the less likelier they are to out-perform the rotational model. Nevertheless, it is interesting that over most of a decade, however, that such an approach has performed pretty well, indeed.

Here is the breakdown for the PPP stocks since 1989. The returns are since they joined the portfolio in their respective years: 

1989  ALD   367%
1990  ALD   462%
1991  GT    521%
1992  AXP   278%
1993  UK    177%
1994  Z      -6%
1995  CHV    62%
1996  CHV    38%
1997  T     -19%

Fool on!

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________


1997 Foolish Four Model
Stock  Change   Last
--------------------
T    +   3/8   35.50
GM   +   1/4   56.88
CHV  -   1/8   71.88
MMM  +1  1/4   91.00

               Day   Month    Year
        FOOL-4   +0.72%  -1.00%  -0.58%
        DJIA     +0.49%  -0.35%  13.29%
        S&P 500  +0.40%  -0.57%  13.86%
        NASDAQ   +0.75%  -0.73%   7.67%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     71.88    10.58%
   1/2/97  120 3M            83.00     91.00     9.64%
   1/2/97  179 Gen. Motor    55.75     56.88     2.02%
   1/2/97  479 AT&T          41.75     35.50   -14.97%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  153 Chevron     9945.00  10996.88  $1051.88
   1/2/97  120 3M          9960.00  10920.00   $960.00
   1/2/97  179 Gen. Motor  9979.25  10180.63   $201.38
   1/2/97  479 AT&T       19998.25  17004.50 -$2993.75


                             CASH    $609.53
                            TOTAL  $49711.53