<FOOLISH FOUR PORTFOLIO>

The Un-Dow
Beating the S&P 500

by Ann Coleman (TMF [email protected])

Alexandria, VA (February 12, 1999) -- Mechanical investing strategies, like the Foolish Four, are wonderful ways for new investors to get started picking stocks. Many who start this way go on to more sophisticated stock-picking strategies involving fundamental analysis, reading annual reports, computing debt ratios, and free cash flow analysis.

Then there are the rest of us.

Stock picking is something that one has to love to do it well. I've been reading Roger Lowenstein's excellent biography of Warren Buffett, Buffett: The Making of an American Capitalist. It certainly makes a great case for picking stocks based on fundamental value and knowledge of the business. A photographic memory, an instinctive feel for numbers, and an obsessive personality also help.

Which brings me back to the rest of us. Today, I would like to introduce you to the un-Dow. A couple of years ago, then Foolish message board participant now Official Fool Ethan Haskel got to wondering how the principles of the Foolish Four would work applied to stocks other than the Dow. After all, if the high yield, low priced stocks of major US corporations tended to do well, they should do well whether they were listed as members of that silly Dow Jones Industrial Average or not, right?

Right -- as it turns out. Beating the S&P is an intriguing alternative to the Dow-based strategies.

Ethan went to the Standard & Poor's 500 Index looking for Dow-like stocks that were not part of the DJIA. Instead of GM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, the BSP list has Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>; instead of Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %>, Mobil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %>; instead of Coke <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>; instead of Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>. You get the picture. From this list of 30 un-Dow companies, one can generate a four- or five-stock strategy based on any of the Foolish Four formulas.

Last year, the Beating the S&P variation that used the RP formula returned 41.7%. That's impressive. Other variations also beat the index, although not by as wide a margin.

Before you start wondering why we have been hiding this jewel, I had better explain that Beating the S&P is followed in our Foolish Workshop. Every Wednesday, Ethan Haskel provides an update. But it is a newer strategy that has only been backtested 12 years, not the 38 years of the Foolish Four. While it certainly looks promising, especially since it isn't being followed anywhere else that I know of, it hasn't yet reached the same level of credibility in my mind that the Foolish Four has.

If you are interested in investigating Beating the S&P or some of the other mechanical strategies that our message board participants have come up with, click on over to the Foolish Workshop. Some recent columns by Ethan Haskel that will help bring you up to date on Beating the S&P are listed below, and you might also want to check out his home page at http://hometown.aol.com/Cormend/index.html. (If you visit it, please scroll down and keep scrolling if you run out of text. There seems to be a lot of extra space on that page at the moment.)

Foolish Workshop Reports on Beating the S&P:

01/06/99, It Was a Very Good Year
01/13/99, What's That Smell?
01/20/99, The Hazards of Wheat Germ?
02/03/99, Patience is a Virtue

You might also want to visit our Foolish Workshop message board to see how these various models are developed. It might be a good idea to start with the board FAQ. There is a link to it at the bottom of every message screen.

Our Dow Investing/Foolish Four Message board is also humming, with a discussion about the future of the Foolish Four and comments on the articles we've been writing this week about the viability of Dow strategies in general. There are some very insightful and thought-provoking posts on this topic in there. That group has also put together a FAQ for board newbies that is an excellent way to review the basics of the Foolish Four and Dow Investing in general. Enjoy!

Next week: More on fundamental stock picking issues. We take on the P/E!

Fool on and prosper!

Today's Stock Lists | 1998 Dow Returns

02/12/99 Close
Stock  Change   Last
--------------------
CAT  -  11/16  44.81
JPM  +2  3/16  108.38
MMM  +   1/2   77.38
IP   +1  5/16  42.69

                   Day   Month    Year   History
        FOOL-4   +0.96%   3.20%   1.04%   2.54%
        DJIA     -0.95%  -0.90%   1.17%   0.76%
        S&P 500  -1.91%  -3.87%   0.39%   0.64%
        NASDAQ   -3.48%  -7.34%   5.89%   7.34%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   14 3M            73.57     77.38     5.17%
 12/24/98   24 Caterpillar   43.08     44.81     4.02%
 12/24/98    9 JP Morgan    105.51    108.38     2.72%
 12/24/98   22 Int'l Paper   43.55     42.69    -1.98%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   14 3M          1030.00   1083.25    $53.25
 12/24/98   24 Caterpillar 1034.00   1075.50    $41.50
 12/24/98    9 JP Morgan    949.62    975.38    $25.76
 12/24/98   22 Int'l Paper  958.12    939.13   -$19.00


                             Cash     $28.26
                            TOTAL   $4101.51

</FOOLISH FOUR PORTFOLIO>