The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Apr. 9, 1997)

Over the last several months, I've taken a lot of heat for the well-documented Sheard Effect. That is, whenever Sheard announces a new growth model with a successful back-tested history, it's sure to tank right away.

For those of you who have been with The Motley Fool for a few years will remember my first model, Investing for Growth, which gave birth to this area. After publishing the theory and history for the approach in a Motley Fool Primer in late 1995, the model went into a tail-spin, led by MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>.

Last year, of course, it was Unemotional Growth. I concluded the back-testing in the autumn, during a fantastic year which saw the model record a near-90% gain. Enter the Sheard Effect.

After a strong November, the model posted a modest gain in December and then the roof caved in. The first three months of 1997 saw successive losses of almost 9%, 10%, and 11%, for a whopping deficit of more than 26% for the first quarter.

Not exactly inspiring when the overall market was relatively flat after three months. With the model posting gains early this month, of course, the question is whether the worst is over or if this a sucker pin placement, hoping to entice you to fire at the flag even though it's only 8 feet from the water, with bunkers in front and in back.

No one knows, of course, but the ten-year history suggests that the model's due for some relief after three successive ugly months. In the past, the model has had four successive losing months very rarely.

The problem, of course, is always that very feature the name of the model tries to fight off -- human emotion. It's hard (some would say nigh impossible) to stay with a program that costs you 26% the first few months you use it. But from looking over the historical returns for the 123 months of data we've recorded, some of the best months in any given year are rebounds from weak periods.

If emotion starts to control your decisions, though, you're likely to become market roadkill, jumping out precisely at the worst time, after the damage is done. And then after it has a strong month or two, you'll jump back in, thinking the danger is gone, just in time to hit the next correction. Ouch, ouch, and ouch again.

Don't read this as an argument for using Unemotional Growth, or any other screen for that matter. It's true of every strategy. If you don't make yourself stay with a proven strategy when it hits a rough patch, you'll never be able to make it work for you. Discipline is the sine qua non.

On an optimistic note, though, maybe UG has turned the corner. We can always hope. It's off to a promising start for April.

Monthly Growth Screens
(Jan. 3 to present)
 20.70%  Relative Strength  
  8.08%  YPEG Potential  
  2.58%  Low Price/Sales  
  1.67%  S&P 500 Index  
 -2.87%  Investing for Growth  
-12.78%  EPS Plus RS  
-20.04%  Formula 90  
-22.38%  Unemotional Growth

Annual Value Screens
(Jan. 1 to present)
 4.19%  Dogs of the Dow  
 2.72%  Beating the S&P  
 1.79%  Dow Jones Ind Avg  
-2.89%  Dow Combo  
-3.24%  Unemotional Value  
-3.24%  Beating the Dow  
-6.56%  Foolish Four