<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 17, 1998) -- In Friday's column, I apparently struck a chord in my profile of Bob Price's (TMF Sandy) high-yield Dow variation -- the RP Ratio. I haven't received so much e-mail on a single topic for many months. Let me try to answer a few of the recurring questions from those e-mails here today.

There was some confusion about whether the RP ratio is only applied to the ten high-yield stocks or to all 30 Dow stocks. The answer is that you should apply it to all 30 stocks. It's possible that a stock just outside of the High-Yield Ten can still make the RP top list because RP doesn't arbitrarily cut off the rankings after ten stocks.

There was also some confusion about whether one still skips the highest-yielding stock if it's also the lowest priced stock of the ten. With the RP, this distinction isn't made. You simply run all 30 stock ratios, sort them in descending order, eliminate the stock with the highest ratio of the 30, and then buy the next four or five stocks with the highest RP ratios. As with the other Dow approaches, buy them in equal-dollar amounts and hold for at least one year. It's interesting to note, however, that every year the Foolish Four (or UV4) skipped a stock, the same stock was also the one eliminated by the RP Variation.

Why has this approach fared better than the traditional Dow Dividend Approaches over the last several decades? My belief is that using the ratio, which includes both elements for successful high-yield investing (low price and high yield), is a more practical and logical approach. Is a stock with a yield of 2.10% and a price of $85 really a better option than a stock with a 2.09% yield and a price of $30, just because the former is #10 on the high-yield list and the latter is #11? I don't think so, but that's what the High-Yield rankings suggest.

Such an arbitrary distinction is eliminated with the RP Ratio. And, in fact, the stock with the slightly lower yield in the example above would have a higher (better) RP Ratio than the one making the traditional High Yield list. 

     (2.10 x 2.10) / 85 = 0.0519 
      (2.09 x 2.09) / 30 = 0.1456

In the traditional dual screen, the primary element of the process -- high yield -- is ultimately ignored in the final ranking, which is done by price alone. The RP Ratio doesn't eliminate one or the other element in the ranking process; it incorporates both elements to come up with a single ranking factor that bypasses the use of the arbitrary cut-off after ten stocks. This eliminates the problem of a Foolish Four stock being ranked #2 one day and falling entirely off the list of ten the next.

One huge caution here, though. The fact that RP has a better long-term history in no way diminishes the other models' histories. If you loved the old Foolish Four, it's just as valid today as it was when it was still the official Foolish Dow favorite. If you loved the new Foolish Four last week, it's just as lovable today. And there's no guarantee that one model will outperform another in any given period. So if you're thinking about switching to RP, don't bail on your current stocks in mid-year. Finish out your normal cycle and make the switch, if you like, when your regular adjustment is called for.

One final, and very important note: While the official Foolish Four model is not changing, I'm adding the RP Ratio calculation to my nightly update of the 30 Dow stocks in the Dow Statistics Center. Look for a file called Current Dow Order if you want to check your calculations against mine. This file is updated every evening. And if you'd like a year-by-year examination of the RP Variation, or any of the other popular Dow strategies, I believe the newest version of the Dow Spreadsheet will be including that history. Check with FoolMart for details on this spreadsheet.

Fool on!

[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   -   1/16  47.13 
 IP   +   3/8   48.50 
 MO   +  15/16  42.81 
 EK   -   3/16  66.75 
 
            
                    Day   Month    Year 
         FOOL-4   +0.58%   4.81%   6.75% 
         DJIA     +0.34%   6.22%   6.20% 
         S&P 500  +0.26%   4.33%   5.39% 
         NASDAQ   -0.41%   5.19%   8.47% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     48.50    12.46% 
  12/31/97  206 Eastman Ko    60.56     66.75    10.22% 
  12/31/97  291 Union Carb    42.94     47.13     9.75% 
  12/31/97  276 Philip Mor    45.25     42.81    -5.39% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  14016.50  $1553.38 
  12/31/97  206 Eastman Ko 12475.88  13750.50  $1274.63 
  12/31/97  291 Union Carb 12494.81  13713.38  $1218.56 
  12/31/97  276 Philip Mor 12489.00  11816.25  -$672.75 
  
  
                              CASH     $77.19 
                             TOTAL  $53373.82