<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 25, 1998) -- Recently there's been a buzz in the Foolish Four message boards on the website about research performed by TimberFool and MontanaFool. These two gentleman have been analyzing data to generate an answer to the 12-month versus 18-month question that arose when Congress added another layer of capital gains tax levels last year. Talk about the spirit of Foolish independence! These guys are living examples of the Foolish spirit.

While I've only seen a part of the research done by our two readers, I want to add another research study to the picture. John Southard of Nike Securities was gracious enough to forward me the results of Nike's study into this same question. Nike offers unit investment trusts for the High Yield 10 and Beating the Dow 5, so they, too, needed to know what was best for their trust investors. Nike calls the models Target 10 and Target 5.

John sent me a summary of their tests for these two models. Included was a comparison of 12-, 18- and 24-month holding periods for each model. But also included were comparisons starting at the beginning of each new month to test seasonal differences.

Here, then, are the results of Nike's study over the last 30 years. (They also studied shorter periods, and while the raw return figures go up in recent years, of course, the same general relationships hold steady.) 

         Target 5 (Beating the Dow 5) 
             12 mos.    18 mos.     24 mos.   
 January      18.82      18.29       20.38 
 February     15.97      17.11       19.24 
 March        15.93      17.33       18.14 
 April        15.82      17.40       17.77 
 May          14.73      15.83       17.51 
 June         14.25      16.38       14.81 
 July         14.72      15.98       15.14 
 August       15.25      15.72       14.49 
 September    14.75      16.04       15.60 
 October      14.64      16.65       18.20 
 November     15.93      16.81       18.69 
 December     18.14      17.70       20.26 
  
          Target 10 (High Yield 10) 
             12 mos.    18 mos.     24 mos.   
 January      16.40      15.60       17.32 
 February     14.27      14.88       16.52 
 March        14.50      14.81       15.95 
 April        14.10      14.87       15.31 
 May          14.10      14.25       15.85 
 June         14.30      15.58       14.56 
 July         15.20      15.61       14.28 
 August       14.35      14.48       13.73 
 September    13.88      14.24       17.05 
 October      14.04      14.84       15.80 
 November     14.58      15.06       16.59 
 December     16.36      15.63       17.48

Conclusions? Based on the 30-year study represented here I think a couple of points are clear (and consistent with TimberFool and MontanaFool's findings). In 10 of the 12 months, the 12-month holding cycle under-performs the 18-month holding cycle for simple pre-tax returns. In the two exceptions (January and December), the difference is small enough in both cases that on an after-tax basis, the 18-month cycle is still superior.

So these data point to a clear-cut victory for the 18-month holding period. In every month's test, the after-tax returns would be better than with the 12-month holding cycle.

Another conclusion we can draw from these data is that December and January starting dates significantly out-perform the rest of the year. The other ten months still consistently beat the market, but the months ending and beginning each year beat all other starting dates by two or three percentage points per year -- a mammoth difference in total returns over a 30-year stretch like this one.

Another interesting development is that an even longer holding period (24 months) works better yet for most of the year. With the exception of June, July, and August, a two-year holding period even out-performs the 18-month cycle. For some reason (one I can't explain), the 18-month cycle does better in those summer months.

TMF Sandy's study is on its way as well, so we'll have even more data to pore over, but at least three separate studies now point to the 18-month holding period being superior to a 12-month cycle for both pre-tax and after-tax returns. Interestingly, in the two best months to begin -- January and December -- the pre-tax returns (but not the after-tax returns) are better on the 12-month cycle than on the 18-month cycle.

I'm sure this study will raise as many questions as it answers, so review the numbers yourself and see what conclusions you can draw. But on an after-tax basis, it seems clear to me that holding at least an additional six months is a double bonus (higher pre-tax returns and a lower capital gains tax rate). Please bookmark this column as I'm sure we'll be referring to it again and again in the future. And my thanks go to John Southard at Nike Securities for sharing this study with us. Fool on!

[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   +   7/16  45.81 
 IP   +   3/8   47.38 
 MO   -   3/16  41.00 
 EK   +   5/8   65.63 
 
            
                    Day   Month    Year 
         FOOL-4   +0.61%   1.98%   3.87% 
         DJIA     +1.05%   6.97%   6.95% 
         S&P 500  +1.20%   6.39%   7.47% 
         NASDAQ   +1.60%   9.08%  12.49% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     47.38     9.86% 
  12/31/97  206 Eastman Ko    60.56     65.63     8.36% 
  12/31/97  291 Union Carb    42.94     45.81     6.70% 
  12/31/97  276 Philip Mor    45.25     41.00    -9.39% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  13691.38  $1228.25 
  12/31/97  206 Eastman Ko 12475.88  13518.75  $1042.88 
  12/31/97  291 Union Carb 12494.81  13331.44   $836.63 
  12/31/97  276 Philip Mor 12489.00  11316.00 -$1173.00 
  
  
                              CASH     $77.19 
                             TOTAL  $51934.75