<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 17, 1998) -- The number one question for months now has been whether a 12-month cycle should be replaced by an 18-month cycle with the Dow Dividend Approaches. And Bob Price's study is finally completed. While I don't have all of the raw data to lay out for you, today I'll pass along some of the summary conclusions Bob's made from his research.

A few words about Bob's study itself. The study includes a monthly database for all of the Dow stocks (and variations) from 1962 through 1997. And in testing different holding periods from 12 to 24 months long, Bob tested every possible period, not just the ones you might have witnessed had you been using such an approach on a single portfolio. For example, in Bob's check of an 18-month period, he didn't check January 1962 to June 1963, then pick up with July 1963 and carry forward to December 1964. Instead, he tested each possible 18-month cycle to get his composite returns, very much as Lawrence Pratt did in a similar study a few years ago.

The results Bob derived from a number of Dow Approach variations all pointed to a similar answer to Pratt's; the optimal holding period appears to fall in the area of 19 months.

Before you jump too quickly into an 18-month mindset, though, there's more to consider. Another question raised recently concerns the best time of the year to begin, and Bob's data confirms the suggestion we found in the Nike Securities data that an investor beginning in December or January enjoyed better returns than investors starting at other times of the year. But as you can quickly guess, holding for 18 months and trying to take advantage of this sweet spot in the calendar can't work together. If you begin in January and update after 18 months, you're updating in the middle of summer and losing the apparent year-end boost every other time.

Another factor to consider is that some of these stocks, when using a 12-month cycle, will stay in the portfolio for a second year anyway, and thus qualify for the lower tax rates available for holdings of 18 months.

So what's a Fool to do? With the significant historical advantage in starting in December or January, it might be that the best plan is to begin at that time of the year and hold for either 12 months or 24 months. That way you can take advantage of the seasonal advantage. The 24-month returns are slightly better than the 12-month returns in Bob's composite rankings, so if you're trying to take advantage of both the lower tax rate and the seasonality of the model, you might consider breaking your Dow investment money in half and running two separate 24-month groups, staggered one year apart and beginning in December of January. That way you can continue to add new money every year. You knew there wouldn't be an easy answer, didn't you?

If you have specific questions about Bob's study you'd like to see addressed, please write him at TMF [email protected]. He probably won't be able to address each e-mail individually, but he can use the questions you have to prepare other details using the data he's gathered. Fool on!

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and soon at your local bookseller.]

TODAY'S NUMBERS

Stock Change Last -------------------- UK + 13/16 51.50 IP + 9/16 54.56 MO - 1/16 39.88 EK -1 1/16 70.63

Day Month Year FOOL-4 +0.29% 6.22% 13.45% DJIA +1.00% 4.18% 15.92% S&P 500 +1.31% 1.90% 15.69% NASDAQ +0.45% 1.68% 18.86% Rec'd # Security In At Now Change 12/31/97 289 Int'l Pape 43.13 54.56 26.52% 12/31/97 291 Union Carb 42.94 51.50 19.94% 12/31/97 206 Eastman Ko 60.56 70.63 16.62% 12/31/97 276 Philip Mor 45.25 39.88 -11.88% Rec'd # Security In At Value Change 12/31/97 289 Int'l Pape 12463.13 15768.56 $3305.44 12/31/97 291 Union Carb 12494.81 14986.50 $2491.69 12/31/97 206 Eastman Ko 12475.88 14548.75 $2072.88 12/31/97 276 Philip Mor 12489.00 11005.50 -$1483.50 CASH $415.96 TOTAL $56725.27