<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Feb. 26, 1998) -- In last evening's Daily Dow column, I presented the returns from a study performed by Nike Securities on different holding periods for the Beating the Dow 5- and 10-stock approaches. Many of you wrote to me with questions, and rather than answer each e-mail individually, let me answer the questions here for all to see at once.

Primarily there were two questions:

Were the listed returns total returns for the period or annualized returns? That one's easy. All of the figures in the charts were annualized returns, so the 18-month figures really were better than the 12-month figures. Sorry I failed to mention that last night. The second question is more difficult.

On the 18-month test, if the portfolio began in January, was it then updated the following July or was a new 18-month portfolio started over every January to generate this number? And if it was indeed updated in July, why aren't the January and July returns virtually identical?

I don't know the answer yet, unfortunately, but have written to Mr. Southard at Nike for a clarification. If the test was run simply by running a new group for 18 months every January, then that explains some of the gap between winter and summer starting points and the gap is in reality much less pronounced. I'll keep you posted on this question when I receive a clarification.

In a totally different direction, Ann Coleman (TMF AnnC) put her eagle eye to work and noticed something that appeared to be an error in our 1998 Dow Returns page last week (The situation doesn't exist right now but could again.) On that page we track both the DJIA and the Dow30. What's the difference?

The DJIA -- the index itself -- is price weighted. That means the stocks with the highest prices have the most influence on the movement of the index. We track the Dow30 somewhat differently, assuming an equal-dollar amount in each of the 30 stocks at the beginning of the year. That way a stock priced $40 a share carries the same weight as one that costs $120 a share. We also include dividends in our Dow30 figure.

Because of those dividends, we assume the Dow30 return will be higher than the straight index return, but that's not always the case. If the stocks with the highest prices have done the best in percentage terms for the year, they will have pushed the DJIA up more than the Dow30, which reduces the influence of those high-priced stocks, even though we also account for dividends there. So if you ever see the index (without dividends) sporting a higher return than the Dow30, it's not necessarily an error. It just means that the high-priced stocks have been boosting the index. 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 
 -------------------- 
 FOOL-4  +0.12%  4.00% 
 DJIA    +0.39%  7.36% 
 S&P 500 +0.55%  8.06% 
 NASDAQ  +0.60% 13.17% 
 
            
                    Day   Month    Year 
         FOOL-4   +0.12%   2.11%   4.00% 
         DJIA     +0.39%   7.39%   7.36% 
         S&P 500  +0.55%   6.98%   8.06% 
         NASDAQ   +0.60%   9.74%  13.17% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     46.94     8.84% 
  12/31/97  291 Union Carb    42.94     46.56     8.44% 
  12/31/97  206 Eastman Ko    60.56     63.31     4.54% 
  12/31/97  276 Philip Mor    45.25     42.63    -5.80% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  13564.94  $1101.81 
  12/31/97  291 Union Carb 12494.81  13549.69  $1054.88 
  12/31/97  206 Eastman Ko 12475.88  13042.38   $566.50 
  12/31/97  276 Philip Mor 12489.00  11764.50  -$724.50 
  
  
                              CASH     $77.19 
                             TOTAL  $51998.69