Thursday, June 5, 1997
Two Foolish Lessons
Learnt
by One Foreign Fool
by
[email protected]
Lesson One: Following a Beating the Dow-type strategy is hard, very hard.
Before I'd actually committed any pounds sterling to Beating the Footsie (a cheapest high yielders approach using the London FTSE-30 stocks instead of the Dow 30), I had a pretty firm idea of how it would feel to be a long-term dividend-yield investor. I saw myself sitting back, Foolish, footloose and fancy-free, ignoring my portfolio until the allotted year was up, when I would calculate its performance ("Down 15% this year? Ho hum, well, better luck next year!") and reallocate into the new selections. In the meantime, I was going to use my time Foolishly in life-enhancing pursuits -- taking up surfing, finally clearing up the fifty or so books accumulated on the floor by my bed and dusting down the complete works of Will S. to see if there really is mention of Foolery or whether the Gardner boys are perpetrating one of the greatest literary frauds of their generation.
UnFoolishly, of course, it hasn't quite worked out like that. Despite the soundest of intentions, each day after checking the obituary pages, my fingers, as if of their own free will, find themselves walking slowly to the PRICES page of the newspaper. Then, also automatically and as if by magic, mine eyes do scan the five stocks making up my Beating the Footsie portfolio. And do they like what they see? No sir, not one little bit! You Fools may have AT&T in the USA, but here in the UK we suffer with BICC, an international engineering company. Down from 270 pence three months ago to 168 pence now, this company is undergoing major problems following a restructuring last year. Of the other four stocks, one has done quite well (Guinness, following announcement of a merger with Grand Metropolitan) and the other three (BTR, Tate & Lyle and Allied Domecq) are all down.
Now, the right side of my brain whispers, insidiously and Gollum-like: "Sell, my lovely, sell ; BICC's not your friend, it's pulling you down. It's so unfair. Oh, sssssssell, my precious, ssssssell...."
The left side, on the other hand, says: "Pull yourself together, man! You're in this for the long haul and you're betting on the strategy as a whole to succeed, not one particular stock. Remember O'Shaughnessy talking about strategies in 'What Works on Wall Street'; you're betting on the base rate and as soon as you start to let emotions like fear or greed into it, you're sunk."
The left side, of course, is right and in a sense what I am going through is reassuring. It reassures me that this strategy, involving long-term, contrarian persistence in the face of seemingly compelling arguments to cut and run is an exceedingly difficult one to follow. For that reason alone it is unlikely ever to gain widespread currency and as far as I am concerned it is the final nail in the coffin of the Efficient Markets Hypothesis.
<<From backstage: sound of coffin creaking shut, followed by hammering of nails -- THUD! THUD! THUD!>>
And now for lesson two, which will explain why I am having such extra-special, kicking myself angst about BICC...
Lesson Two: Ye shall always use up-to-date sources of information when calculating Beating the Footsie rankings, or be prepared to live with the consequences, oh UnFoolish One.
All right, it's my own fault and I can't complain, but I pass this on for other Fools to profit from. One week before I started Beating the Footsie, BICC was actually ejected from the FTSE-30. I remember thinking on the day I did the rankings that I should check the current listing, but then comforted myself with the thought that I had a listing only ten days old. "Good enough," I thought. Wrong. Had I been a little less lazy (and how many times have I told myself that in my life?), I wouldn't be in the pickle I am now. I didn't discover my error for a month or so and decided to stick with it as initially things weren't looking too bad, only to gawp, open-mouthed, as the slide into oblivion started shortly after. Had I in fact started a week earlier when BICC was still in the FTSE-30, it would still have been one of the high yield five, so I could easily have landed up in the same position anyway. However, there was obviously a sound reason for its dismissal from the index and it's galling to think that I failed to profit from that decision through my own lack of care.
Anyway, my penance is to stick with BICC for the full year, reflect on the lessons I have learned so far and make a start on lesson three -- don't keep looking in the newspaper!
A Rueful Fool,
David Berger