<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 13, 1998) -- There's a lot of discussion on the message boards (particularly on our website) about the RP variation of the Dow Dividend Approach. Let me reprise that variation today for those of you who haven't heard of it.

As I discussed in yesterday's Foolish Four column, the dual screen we use (top ten yielders, then re-sort by stock price) can lead to some quirky changes in the rankings for the approach. A stock ranked #2 on the price list one day might disappear from the list altogether the next because it's slipped out of the group of ten high yielders.

The RP variation (and you'll have to ask TMF Sandy what the acronym really stands for -- it can change daily -- I'll just call it "really powerful") eliminates that problem by adopting a simple formula that doesn't require the double screening technique, yet still accounts for the theories behind it: high yield and low price are a "really powerful" team.

The RP Ratio is this:

(yield x yield) / price

For example, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> had a yield yesterday of 2.10% at a price of $62.9375. To get the RP Ratio, then:

(2.10 x 2.10) / 62.9375 = 0.0701

After calculating the RP Ratio for all 30 stocks (easily and quickly done if you're using a spreadsheet), sort them in descending order.

For the same reasons we occasionally skip the cheapest stock with the Foolish Four variation, the RP variation always skips the stock with the highest RP Ratio and then selects the next four or five stocks, in equal dollar amounts, and holds them for at least a year.

Why do we need such a ratio? Well, a minor answer is the one I stated earlier, that it eliminates the artificial cut-off of the other Dow Approaches after ten stocks.

But a major reason is that the RP variation has an awesome history, bettering every other Dow Approach we've seen.

Let's look at a comparison of the RP 4-stock approach against the returns for the Foolish Four: 

                    RP 4     Fool Four 
 Past   5 Years:    25.53%     21.29% 
 Past 10 Years:     23.36%     20.92% 
 Past 15 Years:     25.04%     21.66% 
 Past 20 Years:     24.32%     20.87% 
 Past 27 Years:     24.16%     21.97% 
 Past 37 Years:     19.64%     18.20%

It's hard to ask for a more consistent out-performance, and we're not just talking about fractions of a percentage point, but several points per year. By the time you compound those differences over decades, it means a huge difference to your net worth.

For example, $10,000 invested in the Foolish Four in 1971 would be worth $2.13 million going into the beginning of 1998. The same $10,000 in the RP4 would have grown to $3.45 million. An extra $1.32 million after the 27 years.

Now I don't believe you should invest your entire portfolio in four stocks once you have a large enough portfolio to justify the trading costs on a portfolio of 10-20 stocks, but it's hard to argue with the historical returns of the RP Dow Approach as a terrific core for your portfolio. Consider it for your own Dow holdings.

Fool on and have a happy Presidents' Day holiday!

[Still confused about the changes to the Foolish Four? Visit our special collection which explains why the Fools have modified our beloved Dow Approach.]

[Want to be the first Fool on your block to get a copy of Robert Sheard's forthcoming book? Click here to pre-order your copy of The Unemotional Investor.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   -   3/4   47.19 
 IP   +   1/8   48.13 
 MO   -   3/4   41.88 
 EK   +   1/16  66.94 
 
            
                    Day   Month    Year 
         FOOL-4   -0.70%   4.20%   6.13% 
         DJIA     +0.01%   5.86%   5.84% 
         S&P 500  -0.40%   4.06%   5.12% 
         NASDAQ   -0.23%   5.62%   8.92% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     48.13    11.59% 
  12/31/97  206 Eastman Ko    60.56     66.94    10.53% 
  12/31/97  291 Union Carb    42.94     47.19     9.90% 
  12/31/97  276 Philip Mor    45.25     41.88    -7.46% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  13908.13  $1445.00 
  12/31/97  206 Eastman Ko 12475.88  13789.13  $1313.25 
  12/31/97  291 Union Carb 12494.81  13731.56  $1236.75 
  12/31/97  276 Philip Mor 12489.00  11557.50  -$931.50 
  
  
                              CASH     $77.19 
                             TOTAL  $53063.50