<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 19, 1998) -- The Fool Portfolio is updating its Foolish Four stocks this week. As part of their real-money portfolio, the Gardners include the Foolish Four as core holdings, updating the stocks mechanically according to the simple rules.

That change will take place tomorrow and you can read all about their announced switch in the special writeup devoted to the trades. The Fool Portfolio has adopted the 18-month holding period for these stocks in order to capitalize on the new lower long-term capital gains tax rate.

I'm sure you've all seen explanations of the new rate, but let me add mine to the pile, just in case. We now have three investment tax rates essentially. (A fourth will be added in a few years for holdings of at least five years):

Short Term: If you hold a stock one year or less, the gain is taxed at your ordinary income tax rate.

Medium-Term: If you hold a stock at least a year and a day, but not longer than 18 months, the tax rate is either your ordinary income tax rate or 28%, whichever is lower.

Long-Term: If you hold a stock at least 18 months and a day, there are two possible tax rates. For investors in the 15% ordinary tax bracket, the long-term capital gains tax rate is 10%. For everyone else, it's 20%.

Which holding period is better with the Foolish Four? Some research suggests that the 18-month holding period is better; other researchers are claiming 12 months superior. Our own study should be done soon to give us a definitive answer over the life of our Dow database, but whether you opt for 12 or 18 months, I don't suspect you'll find a whopping difference.

Don't forget that only about half the High-Yield stocks turn over each year, so the half remaining for a second year would qualify for the long-term rate anyway. I suspect this factor will put the real after-tax returns for the two holding periods very close together. So choose the holding period that fits your situation best until we have the results of our study. At that point, I'll revisit the issue and explain what the results show.

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   -   1/8   46.31 
 IP   -  11/16  47.75 
 MO   -   3/4   41.44 
 EK   -1        65.25 
 
            
                    Day   Month    Year 
         FOOL-4   -1.23%   2.57%   4.46% 
         DJIA     -0.89%   5.93%   5.91% 
         S&P 500  -0.37%   4.90%   5.96% 
         NASDAQ   +0.66%   6.65%   9.97% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     47.75    10.72% 
  12/31/97  291 Union Carb    42.94     46.31     7.86% 
  12/31/97  206 Eastman Ko    60.56     65.25     7.74% 
  12/31/97  276 Philip Mor    45.25     41.44    -8.43% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  13799.75  $1336.63 
  12/31/97  291 Union Carb 12494.81  13476.94   $982.13 
  12/31/97  206 Eastman Ko 12475.88  13441.50   $965.63 
  12/31/97  276 Philip Mor 12489.00  11436.75 -$1052.25 
  
  
                              CASH     $77.19 
                             TOTAL  $52232.13