The Daily Dow
Friday, July 11, 1997
by Robert Sheard

LEXINGTON, KY. (July 11, 1997) -- A number of new readers -- perhaps some veterans, too -- are aghast at the lousy performance of the Foolish Four this year. (Let's face it, lagging the index by 20 points is lousy.) But there's more to this story.

What's amazing is that a day or two later in starting dates would have meant the difference between holding AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and INTERNATIONAL PAPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> in the coveted number 2 position -- the one weighted 40% of the Foolish Four portfolio. With AT&T down roughly 14% on the year and International Paper up 42%, you can see the huge difference that day or two would have made. To some extent, luck plays a part in the ordering of the stocks with this approach. In 1997, it went against our model. So be it.

But this phenomenon also points out another feature of the Foolish Four and Dow Approaches in general that you should ponder before choosing a strategy. Any portfolio with only four or five stocks carries a very high risk associated with each individual stock. Any single bad performance can drag down the portfolio, even if the rest of the stocks do well.

When it happens, the natural tendency is for doubters to begin questioning whether the approach is suddenly broken, but this phenomenon works both ways and is partly responsible for why the approach has such a terrific long-term performance record. Look at a year like 1991, for example, when GOODYEAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> was in the favored #2 slot and soared to a 180% gain. If that single stock represents 40% of the portfolio, it's going to be a good year regardless of what the other three stocks do.

None of this is to say that carrying 40% of your portfolio is good or bad, but you must be aware of the risks associated with such extreme concentration in a single stock. When the stock does well, it's wonderful; when it tanks....

Choose a risk level you're comfortable with. If the idea of 40% of your money in a single stock keeps you up at night, don't double the #2 stock, or buy more than four stocks. Buy all ten high yielders, for that matter. There's nothing wrong with choosing a different approach from the one we follow here if it fits your needs better.

[Rankings Note: Once again the rankings have changed as several stocks alternate in the final spot on the high-yield list. Today's new entry is Goodyear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>. 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. ________________________________

Stock  Change   Last
--------------------
T    -   1/2   35.25
GM   -1  3/16  55.06
CHV  +1  1/8   75.75
MMM  +   7/16  103.31

          Day   Month    Year
        FOOL-4   -0.44%   0.81%   2.99%
        DJIA     +0.44%   3.14%  22.85%
        S&P 500  +0.32%   3.56%  23.75%
        NASDAQ   +0.78%   4.20%  16.39%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  120 3M            83.00    103.31    24.47%
   1/2/97  153 Chevron       65.00     75.75    16.54%
   1/2/97  179 Gen. Motor    55.75     55.06    -1.23%
   1/2/97  479 AT&T          41.75     35.25   -15.57%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  120 3M          9960.00  12397.50  $2437.50
   1/2/97  153 Chevron     9945.00  11589.75  $1644.75
   1/2/97  179 Gen. Motor  9979.25   9856.19  -$123.06
   1/2/97  479 AT&T       19998.25  16884.75 -$3113.50


                             CASH    $767.60
                            TOTAL  $51495.79