<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 20, 1998) -- One of my favorite saving/investment techniques is what we've begun to call the Dozens method here in the Fool. Many investors are just starting out and don't have enough saved yet to fund a full portfolio, but for a variety of reasons still want to begin with individual stocks. Alternately, an investor may have enough to invest in 10 or more stocks already, but adds new money every month and wants a method to do so without getting chewed up in trading costs. (Where do you put that extra $250 this month?)

The Dozens method has the investor buy one stock every month, choosing the top-ranked stock not already in the portfolio. What rankings you use are up to you, but the idea is that you're always buying the highest-ranking stock that you don't already own and, by the end of one year, you'll have a full portfolio of twelve top stocks. Then, as each stock grows to be a year old (a year and a day if your account is taxable and you're in a high tax bracket), you will re-evaluate it and replace it if necessary.

One possible system I've suggested here in the past may be to select four of the twelve positions from the Foolish Four and the other eight from an approach like Keystone Growth (which we track in the Workshop), or the Cash-King Approach Tom Gardner manages.

What if you are starting slowly and don't have $12,000 to invest the first year? (I recommend a minimum position value of $1,000 to keep commissions manageable.) Start with what you have. Let's say you've saved $1,000 to buy your first stock in January. When February rolls around you don't have $1,000 saved yet. Just keep saving and perhaps in March or April you'll have enough to add a new position. By the end of year one, you may only have four or five of the twelve slots filled. Work on filling the rest in year two, while you're also updating the stocks you already own. It may take you a couple of years to fill all twelve slots, but I suspect once you get started, it'll go faster than you think.

Think of the calendar as a dance card, with one dance open per month. Eventually you'll have all twelve dances filled in, and each year the names on the dances simply change as you pick the highest-ranked stocks each time around.

We follow a handful of these dozens portfolios in the Workshop, but one we’re tracking is strictly using the High-Yield/Low-Price rankings we use for the Foolish Four. Granted, after we've picked five or so stocks, we'll probably end up dipping down the list a bit to get new stocks for the model, but if you split your twelve spots between Foolish Four and other stock screens, you won't run into this problem.

Here's how our Dow Dozen looks so far in 1998. We're adding a mock $1,000 each month in order to buy one more stock. To start the year, we picked up Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>. After the first month, we added International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>. The third stock included was AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>. And recently, Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> joined the group.

The $4,000 we "invested," of course, was spread out over time, so calculating the return requires us to take those different time horizons into account. Nevertheless, the $4,000 we've put in is now worth $4,496.

On an annualized basis, that would equate to a return of 90.0%, a terrific pace that probably isn't sustainable over another three quarters. But compared to the Standard & Poor's 500's annualized pace of 62.0%, it's still significantly outperforming our primary benchmark.

If we translate those annualized numbers into year-to-date returns (based on 110 days since the beginning of the year), you would have 21.3% for the Dow Dozen and 15.6% for the S&P 500 Index.

The beauty of this approach is that every month you can add as much or as little to your portfolio as you want and the trading costs remain fixed at 24 trades a year (maximum). For regular savers, it's a great way of getting a decent amount of diversification (twelve large-cap stocks), minimal trading (everything's held at least a year), and good prospects for market-beating returns (always choosing from among the most highly ranked stocks). If you prefer the 18-month holding period, make your cycle with a dozen and a half holdings instead of a dozen. The same principle applies; you'd just have six more stocks and hold them six months longer. 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   -   1/4   51.25 
 IP   -1  1/4   53.31 
 MO   +   1/8   40.00 
 EK   +2 13/16  73.44 
 
 
                    Day   Month    Year 
         FOOL-4   +0.32%   6.56%  13.81% 
         DJIA     -0.28%   3.89%  15.60% 
         S&P 500  +0.08%   1.99%  15.79% 
         NASDAQ   +1.10%   2.80%  20.17% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     53.31    23.62% 
  12/31/97  206 Eastman Ko    60.56     73.44    21.26% 
  12/31/97  291 Union Carb    42.94     51.25    19.36% 
  12/31/97  276 Philip Mor    45.25     40.00   -11.60% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15407.31  $2944.19 
  12/31/97  206 Eastman Ko 12475.88  15128.13  $2652.25 
  12/31/97  291 Union Carb 12494.81  14913.75  $2418.94 
  12/31/97  276 Philip Mor 12489.00  11040.00 -$1449.00 
  
  
                              CASH    $415.96 
                             TOTAL  $56905.15