Monday, November 24, 1997


The Daily Dow
by Robert Sheard

LEXINGTON, KY. (Nov. 24, 1997) -- All investors are anxious to avoid making mistakes. Well, duh, I hear you say. The problem is that too often investors will back into one set of mistakes in their attempts to avoid other sets of mistakes. In other words, it's important not to worry about being perfect. It's not going to happen with investments or anything else in life.

For the Dow investor, it's all too easy to feel intuitively that a stock in the current rankings is an investment to avoid right now. But it's been my experience that when one starts to tinker with the model based on intuition, the inevitable result is usually weaker than the mechanical model would have achieved.

That's not to say that the model's perfect. Not by a long shot. In fact, over the course of our database history from 1961 to 1996, it's rare to look at the results of the best-performing Dow stocks in any given year and see more than three or four of that year's high-yield group represented. What happened to the other six or seven?, you might ask.

The problem with that kind of thinking is the assumption that success has to mean beating every other possibility. Not so. I think most people would agree that recording an 18% annualized return for the past 36 years, all with only thirty minutes of research a year, is a pretty respectable achievement. Yet that's precisely what the four-stock Unemotional Value approach has done (without over-weighting any of the positions). In fact, the UV4 return of 18.11% since 1961 has outperformed even the famous one-stock Penultimate Profit Prospect, which returned 17.80% (one of a number of reasons I'm not a fan of over-weighting this stock in the Foolish Four).

Could the returns have been better? Of course. It's simple, really; just pick the stocks that are going to go up the most over the next year. Nothing to it, right? Just imagine if you had picked the best five Dow stocks each year. Since 1961, you'd have posted annualized returns of 47.5%. A $100 investment in 1961 would have been worth nearly $120 million at the end of 1996 (excluding taxes, of course).

But as I don't yet have a way of predicting exactly which stocks will be the top performers (my time machine experiment having been a dismal failure), it's not a bad idea to go with a proven strategy that does considerably better than average. Until I get my time machine working (and grow back my eyebrows), working with a simple Dow Dividend Approach is still among the best games in town. Fool on!

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    -1  3/8   54.31
GM   -1        61.06
CHV  -1 11/16  82.88
MMM  -1  1/16  95.69

           
                  Day   Month    Year
        FOOL-4   -1.92%   4.60%  25.04%
        DJIA     -1.44%   4.38%  20.47%
        S&P 500  -1.71%   3.50%  27.80%
        NASDAQ   -2.08%  -0.41%  22.92%

    Rec'd   #  Security     In At       Now    Change

   1/2/97  479 AT&T          41.75     54.31    30.09%
   1/2/97  153 Chevron       65.00     82.88    27.50%
   1/2/97  120 3M            83.00     95.69    15.29%
   1/2/97  179 Gen. Motor    55.75     61.06     9.53%


    Rec'd   #  Security     In At     Value    Change

   1/2/97  479 AT&T       19998.25  26015.69  $6017.44
   1/2/97  153 Chevron     9945.00  12679.88  $2734.88
   1/2/97  120 3M          9960.00  11482.50  $1522.50
   1/2/97  179 Gen. Motor  9979.25  10930.19   $950.94


                             CASH   $1409.35
                            TOTAL  $62517.60