<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (March 23, 1998) -- Every once in a while I receive an e-mail letter that's too good not to include for all of our readers. This morning I got just such a letter from a reader named Michael, who's given me permission to quote from it here.

Last August Michael decided it would be good to keep a history of his investments "so that facts, and not emotionally colored memory," could measure his true results. He set up a spreadsheet with his weekly combined portfolio balance. This included a listing of his entire investment history, listing all of his purchases, all of his sales, and his reason for taking action. He also started tracking his annualized returns (using the XIRR function in Excel).

In December Michael was stunned to discover he had made 26 trades since opening his portfolio in June. But as he says in his e-mail, "that surprise was nothing." The real jolt was yet to come.

Michael started slowly with his first two Foolish Four investments in June, equal investments in Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> and AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>. Since last June his annualized return is sitting at 41% thanks to AT&T and no thanks to Philip Morris. By way of comparison, Michael calculated the Standard & Poor's 500's annualized return over the same period at 31% and the Dow's return at 19%.

Michael's overall portfolio, however, where he did most of his trading, is running on a pace of only 8% annually! If he factors out his cash portion and just focuses on what's in stocks, it still only raises it to a bit over a 10% annual pace.

As Michael wrote in his letter, it's been a "great learning experience." Only by looking at his performance in a completely accountable way did he realize how much he had been trading and how little he had to show for the extra and unnecessary activity.

But perhaps even more Foolish is that Michael didn't take this poor early start to mean that picking individual stocks is completely wrong. It's simply an approach that requires "more research and discipline" than he had been putting in.

I've long maintained the stance that if picking individual stocks doesn't put you ahead of the index-like strategy represented by the Dow Approach, then accept that fact and use the Dow Approach. We have an objective benchmark (set higher, it's true, than the industry benchmark of the S&P 500, but still one that can be met simply by investing in the Dow Approach itself) against which to measure our performance and if the numbers tell us we're losing to it too often, we should accept the truth and simply use the approach. To ignore the objective results is hubris.

Like Michael, I don't think the Dow Approach is the only way to invest well, but it sure points out quickly how well our efforts measure up. Accountability is a central Foolish tenet, not just in terms of what's been written or said about strategies in public, but in our very personal and private measurements of our own performances. Thanks, Michael, for sharing a wonderfully Foolish lesson with us. I suspect next year, you'll look at a much different picture.

A portfolio note: Today I included in the cash line of our 1998 model portfolio the $338.77 the four holdings have earned in first-quarter cash dividends. Don't be thrown by the sudden appearance of an extra 0.6% profit for the portfolio. Fool on!

Go Kentucky -- Final Four Bound Again!

[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   -   7/16  48.00 
 IP   -   5/16  49.56 
 MO   -   1/2   42.69 
 EK   +   1/2   63.25 
 
 
                    Day   Month    Year 
         FOOL-4   +0.16%   1.80%   7.04% 
         DJIA     -1.01%   3.17%  11.48% 
         S&P 500  -0.33%   4.40%  12.89% 
         NASDAQ   +0.19%   1.24%  14.15% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     49.56    14.93% 
  12/31/97  291 Union Carb    42.94     48.00    11.79% 
  12/31/97  206 Eastman Ko    60.56     63.25     4.44% 
  12/31/97  276 Philip Mor    45.25     42.69    -5.66% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  14323.56  $1860.44 
  12/31/97  291 Union Carb 12494.81  13968.00  $1473.19 
  12/31/97  206 Eastman Ko 12475.88  13029.50   $553.63 
  12/31/97  276 Philip Mor 12489.00  11781.75  -$707.25 
  
  
                              CASH    $415.96 
                             TOTAL  $53518.77