The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Feb. 10, 1997)

With the recent weakness of the Unemotional Growth screen (losing 8.55% in the first five weeks of 1997), they're been an outbreak of... well... emotion.

And this is entirely understandable, yet exactly what the individual investor has to fight against to be successful. The minute you start second-guessing your investment approaches, it means one of two things. Either you aren't familiar enough with the mechanics of the approach and should have studied more before investing. Or, you're simply human and understand the risk intuitively but still have to fight the temptation to run screaming for the exit when the inevitable drops come along.

The best way I know to combat the dreaded self-doubt and fear is through education. The more information you have, the more likely you are to see things in a larger context. So today I want to reiterate two points about investing using these kinds of mechanical screens.

The first is what I call the Sheard Effect. It's virtually guaranteed that whenever I unveil a new screen or model with an impressive historical record, it's going down the tubes right after I release it online. It happened initially with Investing for Growth; it happened to some extent last year with Unemotional Value; and it's happened with Unemotional Growth. In the future I will not release any more screens until after they've been in the middle of a bad patch already so I can create a new Sheard Effect when they bounce back. ;-)

The second, and more serious point, is that drops like this are not in any way uncommon for the Unemotional Growth screen over the last ten years. I realize there's no way for you to know that since I haven't found a convenient way to make the month-by-month details available yet, but let me point out again that the model has had a number of such drops over the years.

In the 126-month history I have traced, from August 1986 through this weekend's close of our January model, there have been 19 occasions where the 5-stock portfolio dropped more than 5% in a single month. Of those 19 occasions, 5 of the them have been drops of 10% or more in a single month. And of course, October 1987 takes the dubious prize, losing a whopping 37.48% (reason alone, in my opinion, to consider some kind of sell-stop discipline, even if a very liberal one).

So January's 8.55% loss, while not exactly typical for Unemotional Growth, is certainly not unprecedented. Take it in stride as part of the law of averages. On the other side of the ledger, UG5 has recorded gains of better than 10% in a single month on no less than 28 occasions. Of those, 6 were gains of more than 20% in a single month.

I'm not bringing this up to defend Unemotional Growth. I don't feel it needs defending, actually, given its objective record. But I do feel the need to make some of the historical track record more accessible so readers can see how a month like the last one fits in the larger picture. There's no doubt about it, a loss of 8% or 9% in a month isn't any fun, but it's also not fatal or completely unheard of. Over the next week, I'll try to carve out a place where I can post these month-by-month numbers for all to see. It should help restore some of the Unemotional aspect to the process. Hang in there, dear Fools.

Monthly Growth Screens
     (Jan. 3 to present)
23.23%  Relative Strength  
18.60%  YPEG Potential  
  8.86%  Low Price/Sales  
  5.00%  S&P 500 Index  
 -0.02%  Investing for Growth  
 -8.89%  EPS Plus RS  
-11.17%  Unemotional Growth  

Annual Value Screens
     (Jan. 1 to present)
  5.56%  Dow Jones Ind Avg  
  5.50%  Beating the S&P  
  4.36%  Dogs of the Dow  
  1.19%  Dow Combo  
 -0.07%  Unemotional Value  
 -0.07%  Beating the Dow  
 -2.19%  Foolish Four