Tuesday, December 09, 1997

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Dec. 9, 1997)

Scroll to the bottom for year-to-date Growth and Value Screen results.

There's been a lot of confusion about the various time periods used in measuring our large-cap portfolios against each other. Let me present some simple apples vs. apples comparisons here to clear up some misunderstandings.

Our current Dow database extends from 1961 through the present. But there have been many who have argued (Michael O'Higgins in Beating the Dow, for example) that the regulatory changes and industry changes that came about in the early 1970s give us a different stock market than we had many years ago, and comparing results from before that may give us a distorted picture of what to expect in the future. I'm not going to argue for or against that position here, but the fact that the argument is out there is the reason you'll see performance numbers bandied about over such different time horizons.

So let's look at three different periods in comparing some of the popular Dow approaches and my new Keystone Approach (which has only been tested back to the beginning of 1986 so far). The returns listed are the annualized returns for the period, including dividends, but excluding trading costs and taxes.

From 1961 through 1996

• 21.5% Unemotional Value (2 stocks)
• 19.4% Unemotional Value (4 stocks, with the first two over-weighted)
• 18.1% Unemotional Value (4 stocks, equally weighted)
• 17.4% Foolish Four (with the PPP over-weighted)
• 16.9% Foolish Four (equally weighted)

From 1971 through 1996

• 25.8% Unemotional Value (2 stocks)
• 23.4% Unemotional Value (4 stocks, with the first two over-weighted)
• 22.9% Foolish Four (with the PPP over-weighted)
• 22.0% Unemotional Value (4 stocks, equally weighted)
• 21.9% Foolish Four (equally weighted)

To add in a comparison to Keystone, we can only look back the nearly twelve years I've been able to test the approach.

From 1986 through December 3, 1997

• 29.7% Keystone (five stocks)
• 26.2% Keystone (ten stocks)
• 21.6% Unemotional Value (4 stocks, equally weighted)
• 21.3% Unemotional Value (4 stocks, with the first two over-weighted)
• 21.1% Foolish Four (with the PPP over-weighted)
• 20.6% Foolish Four (equally weighted)
• 20.3% Unemotional Value (2 stocks)

Let me reiterate that I do not advocate a two-stock approach given the risks associated with putting half of one's portfolio in a single position. Nor do I advocate doubling the weight of any stocks. I post these returns simply to show how the results compare to the Foolish Four, which does double the weight of the PPP stock. (The Penultimate Profit Prospect is the term from O'Higgins's book used to designate the stock with the second-lowest share price of the top ten yielders).

Also, let me repeat my caution about the Keystone Approach. This test only includes twelve years of data. We cannot yet test its staying power against the much longer histories for the Dow Approaches. Fool on!

Year-to-Date Returns
Monthly Growth Screens
80.31%  Relative Strength  
30.45%  S&P 500 Index  
29.13%  EPS Plus RS  
28.80%  Investing for Growth  
18.86%  Formula 90  
11.95%  YPEG Potential  
11.48%  Unemotional Growth  
  5.76%  Low Price/Sales  

Year-to-Date Returns
Annual Value Screens
29.06%  Beating the S&P  
28.13%  Foolish Four
24.83%  Dow Jones Ind Avg  
24.73%  Dow Combo  
23.45%  Dogs of the Dow  
22.19%  Unemotional Value  
22.19%  Beating the Dow  

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