<THE FOOLISH FOUR>

A Cure for Bad Timing
by Ann Coleman
(TMF AnnC)

Reston, VA. (October 14, 1998) -- No, I can't cure your propensity to lock in mortgage rates at their peak or buy a new car two weeks before 60 Minutes does a story on its abysmal safety record, but if you are uneasy about the occasional arbitrary changes in the Foolish Four stocks we described on Monday, I can suggest a cure for that.

As we discussed in Monday's column, the stocks that are identified as the Foolish Four picks for any particular day are subject to changes that may, or may not, be particularly significant. When yields are very close for the stocks around 10th place, a stock can be on the list today, off tomorrow, and back on again the next day with very little change in relative prices or yields. It's the nature of the beast.

Even when closely spaced yields are not the culprit, the rankings can and do change with some frequency. It can be disconcerting to realize that the stocks you just bought are no longer on the list a few days or weeks later. (Every time the list shifts, my mailbox fills up with folks wondering if they, or we, made a mistake, or if they should sell their Foolish Four stocks and buy the new list. Answer: No -- in all cases.)

In this respect as well as others, the RP Variation is a major improvement over the method that Michael O'Higgins devised in Beating the Dow for identifying outperforming Dow stocks, which is the rank-by-yield then rank-by-price method we all know and love. The RP Variation has no arbitrary 10-stock cutoff. It looks at a combination of price and yield for all 30 stocks. This largely eliminates the "here today-gone tomorrow" effect.

So far this year, the RP is lagging the Foolish Four, but as I think I have said approximately 7,349,521 times before, you can't, you just CAN'T, evaluate a strategy on the basis of a single year, or even two. It would be like basing an estimate of annual rainfall on one El Nino year. You wouldn't plan your garden based on last year's weather patterns, would you? I'd be planting orange trees in my Virginia backyard if I did that. The entire Midwest would be switching from corn and soybeans to rice paddies.

No, we need a bigger picture. Over the past 5, 10, 15, 20 and 25 year periods, the RP variation has outperformed the Foolish Four -- the differences in the average annual returns range from 2 to 4 percent. (Wow!)

You can be sure we will be following the adventures of the RP Variation closely in this column in the future. The RP rankings can be found on our Current Dow Order page (see below) and the returns to date can be found on the 1998 Dow Returns page (also below).

Meanwhile, it's a relief to see Kodak rebounding, however slightly, from yesterday's precipitous drop. The 7 point drop (10%!) was triggered by good news. (What's that you were saying about Efficient Market Theory?) Kodak beat estimates by $0.03 and grew net income from $0.71 a share for the same quarter last year to $1.23 a share. OK, the market isn't that irrational -- despite the increase in net income, worldwide revenues were down 10% in the face of all this global "stuff" and some pretty intense competition.

Still, the fact that the company managed to increase bottom-line earnings in the face of such a large drop in sales revenues speaks well for its recent efforts at cost cutting and increased productivity. In fact, it looks darned impressive to me.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

10/14/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +1  1/4   41.00 
 IP   -1  1/4   44.81 
 MO   +  15/16  48.94 
 EK   +   3/4   72.75 
 
 
                    Day   Month    Year 
         FOOL-4   +0.77%  -2.33%   8.26% 
         DJIA     +0.39%   1.61%   0.77% 
         S&P 500  +1.07%  -1.13%   3.62% 
         NASDAQ   +2.09%  -9.02%  -1.87% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     72.75    20.12% 
  12/31/97  276 Philip Mor    45.25     48.94     8.15% 
  12/31/97  289 Int'l Pape    43.13     44.81     3.91% 
  12/31/97  291 Union Carb    42.94     41.00    -4.51% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  14986.50  $2510.63 
  12/31/97  276 Philip Mor 12489.00  13506.75  $1017.75 
  12/31/97  289 Int'l Pape 12463.13  12950.81   $487.69 
  12/31/97  291 Union Carb 12494.81  11931.00  -$563.81 
  
  
                              CASH    $754.73 
                             TOTAL  $54129.79