The original Foolish Four was developed using nothing more than a list of 10 stocks (the High-Yield 10 in price order) and their annual returns for 1971 through 1993. It wasn't much to go on, so the Fools got busy and developed a database with price and dividend information for all 30 Dow stocks. That let us see the basis on which each stock was selected and verify the returns. Randy Befumo spearheaded this effort in an attempt to disprove the validity of such a simple system. He ended up converted, although somewhat reluctantly.

Fools on the message board had noted that the number 1 BTD stock was not always a disaster. Sometimes it performed quite well, actually. Was there any sign, they wondered, that might serve to indicate when it was a potential disaster and when it might be safe to invest in it?

Robert Sheard, keeper of the virtual Foolish Four Portfolio, delved into the newly developed database and found "the sign." Almost every time that the lowest priced stock (# 1 on the BTD list) was also #1 on the high yield list (i.e., it was the highest yielding stock on the Dow), it was a disaster. There were two exceptions, 1964 and 1975, but in the five other years in which the lowest priced stock was also the highest yielder, the best year was a 19% loss.

If you simply avoided the years where the #1 BTD stock was also the highest yielder, the average returns for the #1 stock were quite respectable. Robert coined the phrase Unemotional Value to describe his version of Dow Investing. One of the nicest things about the UV strategy was that it beat Beating the Dow without having to double up on the #2 stock (O'Higgins's PPP). This resulted in a strategy with more consistent returns. Foolish 4.0's over-weighting in that one stock improved overall returns, but when the PPP had a bad year it could be a disaster. For statistics buffs, the Standard Deviation for Foolish 4.0 (2,2,3,4,5) was 24.34% vs. 21.88% for Foolish 4.1 (UV).

Realizing that the Foolish Four was an excellent entry-level investing strategy, Tom and David Gardner opted to switch to the more stable UV strategy as their official Foolish Four in You Have More Than You Think published in December 1997. It was adopted as the strategy for the Foolish Four model portfolio in 1998 at the same time and was used in the Fool Portfolio (now Rule Breaker portfolio) when its Foolish Four component came up for renewal in February of 1998.

Foolish 4.1 returned 22.21% from 1973 to 1993*, and 25.64% from 1995 to 1997. Its 25-year compound average annual return (1973-1997) is 21.86%.

Meanwhile, those busy bees on the message board were still fiddling with the spreadsheet looking for better ways to select stocks. Many strategies were proposed, some quite good, but one stood out: Foolish 4.2 - the RP variation.

*A note on these numbers: The returns quoted here are Compound Annual Growth Rates (compounded Average Annual Returns) for each strategy. We used the returns starting with 1973 because Beating the Dow (1992 edition) is based on data starting in 1973. The first set of returns goes from 1973 through 1993. 1993 was the cut off because that was the last year of full returns available for research when the original Foolish Four was developed.

These returns won't match those in Beating the Dow because they include two additional years and because BTD uses a December 31 renewal data while our spreadsheet uses a January 2 renewal date. They are all directly comparable with other returns quoted here, however, and they are very close to the BTD returns quoted at the end of the book, which covers 1973-1991.

The recent returns start in 1995 because that was the first full year during which the original Foolish Four strategy could be used. It happens that 1994, which is left out of each of these periods, was also a rather bad year for investing, but that's not why it was left out. It just happened to be the watershed year. It is included in the 25-year compound returns, of course.

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