<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 4, 1998) -- Among the nuggets of investing Wisdom to come to us from academe are the ideas of the "random walk" and the "efficient market." In short, the theory here is that all of the relevant news available at any given time is priced into a stock efficiently and there's no way investors can beat the market consistently. Investing in stocks is theoretically a "random walk" at the mercy of this efficient market (which is an ironic argument for index funds).

The seven-decade history of the Dogs of the Dow and the long-term records of investors like Warren Buffett and Peter Lynch put paid to the idea that one can't outperform this efficient market over long periods of time.

Today, however, let's look at an example of just how logical our efficient market is. In a Sunday paper in London, and again in New York Monday, it was reported that a proposed merger between British Petroleum's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BP)") else Response.Write("(NYSE: BP)") end if %> chemicals division and Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> had been considered but then abandoned. Most of us might read this as no news at all.

Yet this morning, Union Carbide's stock soared ten percent anyway. (It closed up nearly seven percent.) Now I suppose there are two ways of looking at this. If you subscribe to the efficient market theory, you would explain the ten percent jump as a residual effect that the deal might be resurrected, either by British Petroleum or someone else. If you don't believe in the efficient market, the ten percent jump is wild guessing and speculation on rumors and hopes, the antithesis of anything efficient.

Fools don't believe in perfectly efficient markets, but neither do we believe in investing on rumors and speculation. So today we'll smile that one of the 1998 Foolish Four stocks soared ten percent, but we won't celebrate too much, knowing quite well reality could set in tomorrow and bring Union Carbide right back to Friday's levels. In other words, we don't know where the stock's going or if it will indeed merge eventually with British Petroleum or anyone else. If it happens, it's a bonus. The big difference, however, between us and the Wise is that we're willing to admit we don't know and we're not about to make any hasty decisions based on the scuttlebutt.

But for today, anyway, we'll enjoy it. Fool on!

Current Dow Order | 1998 Dow Returns

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

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   +3  5/16  51.50 
 IP   +  15/16  53.50 
 MO   +1  9/16  39.19 
 EK   +2  9/16  76.19 
 
 
                    Day   Month    Year 
         FOOL-4   +3.98%   4.70%  14.75% 
         DJIA     +0.50%   1.43%  16.24% 
         S&P 500  +0.09%   0.93%  15.63% 
         NASDAQ   +0.20%   0.47%  19.54% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     76.19    25.80% 
  12/31/97  289 Int'l Pape    43.13     53.50    24.06% 
  12/31/97  291 Union Carb    42.94     51.50    19.94% 
  12/31/97  276 Philip Mor    45.25     39.19   -13.40% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15694.63  $3218.75 
  12/31/97  289 Int'l Pape 12463.13  15461.50  $2998.38 
  12/31/97  291 Union Carb 12494.81  14986.50  $2491.69 
  12/31/97  276 Philip Mor 12489.00  10815.75 -$1673.25 
  
  
                              CASH    $415.96 
                             TOTAL  $57374.34