<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (March 18, 1998) -- Yesterday I got the grim (but expected) news from my accountant concerning the check I'll have to write to Uncle Sam in a few weeks, and I'll tell you, it makes you wonder whether actively managing a portfolio is worth the trouble when taxes jump up and bite you in the assets once a year.

Even though the emotional damage done every April is bad, it's still better to pay the taxes as you go in the best long-term strategies than try to avoid taxes now by holding stocks forever and accept a lower annualized return. I addressed this issue recently when I compared the Standard & Poor's 500 Index's pre-tax returns over the last several decades with the after-tax returns on the Foolish Four and demonstrated that even after taxes, the approach is likely to outdo the before-tax index rate.

Today, I want to throw out some numbers, though, for those of you who might like to consider buying and holding stocks instead of the index fund. I still think you're better off with a rotational strategy and biting the tax bullet each year, but it can be a close call if you choose the right stocks. (Anyone have a crystal ball?)

Over the last ten years, the average annualized return for the thirty current Dow components has been 18.8%. It's been an extraordinary decade, however, and the rate for the much longer term is more in the range of 12%. The best return of the group belongs to Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, sporting a pace of 33% a year for the decade. The low goes to IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, with 9% a year (still better than sticking your dough in a bank).

Over the last five years, the numbers go even higher. The average for all thirty stocks is 23.7% a year. The high is 45% from the Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> and the low is 8% from Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, which is certainly making up for lost time over the last year.

Over the last three years, the average return climbs even higher, to 31.3%. Travelers Group remains on top, with a mammoth 63% annualized return. International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> brings up the rear with an annual rate of 9%. It's interesting that some of the worst stocks on these lists have blown the roof off lately. Maybe there's something to this Dow Dogs theory after all? <wink, wink, nudge, nudge>

I guess the point of all this is that even a simple buy-the-index-and-hold-on-till-the-cows-come-home approach isn't all that bad. And when I have to take a step back in taxes for every four I take forward in returns, it gets aggravating, but it's too easy to forget that such a dance still puts me forward three steps every time around the floor.

As with everything else in Fooldom, it pays to run the numbers for yourself and check your intuition and emotion with the valet. The long-term number is the one to focus on, not the short-term figure that makes you grumble as you write that check to Bill and the Gang to fritter away on our behalf. Count me as one vote for the flat-tax!

[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   +1  1/4   46.94 
 IP   -1  5/8   50.13 
 MO   -   1/4   42.44 
 EK   +1  1/8   62.06 
 
 
                    Day   Month    Year 
         FOOL-4   +0.11%   0.28%   5.44% 
         DJIA     +0.65%   2.69%  10.97% 
         S&P 500  +0.58%   3.45%  11.86% 
         NASDAQ   +0.01%   1.00%  13.88% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     50.13    16.23% 
  12/31/97  291 Union Carb    42.94     46.94     9.32% 
  12/31/97  206 Eastman Ko    60.56     62.06     2.48% 
  12/31/97  276 Philip Mor    45.25     42.44    -6.22% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  14486.13  $2023.00 
  12/31/97  291 Union Carb 12494.81  13658.81  $1164.00 
  12/31/97  206 Eastman Ko 12475.88  12784.88   $309.00 
  12/31/97  276 Philip Mor 12489.00  11712.75  -$776.25 
  
  
                              CASH     $77.19 
                             TOTAL  $52719.75