<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY (May 7, 1998) -- Let's get down to basics today. With the stock market enjoying three successive years of tremendous gains, it's not surprising that we're hearing a lot of gloom-and-doom prophecies lately. The fact that the gloom-and-doomers have been singing the same tired song ever since 1994 doesn't seem to bother them, but so be it. The first requirements of a market gooroo are to be strident and have a short memory.

But a number of readers are shocked to run across references in the press this year that one of the Dow Approach's staunchest supporters in the past is suddenly claiming the approach is dead. Michael O'Higgins, author of Beating the Dow, has been arguing that the approach isn't worth doing any more. (In fact, in one cynical comment, he claims he abandoned the approach even before he wrote the book and that the book was just his gift to readers. Nice.) Instead, he's arguing for a new market-timing approach that alternates among the Beating the Dow stocks (apparently they'll still work on occasion?), bonds, and t-bills.

If you've been a reader of the Motley Fool for any time at all, you know what we think of market timing. (Unfortunately, in cyberspace, you can't see the face I'm making at the moment.)

So, should we be worried that the end of the strategy is at hand? Let's put it into a slightly larger context and then you tell me.

The Dow Jones Industrial Average went to 30 stocks permanently some seven decades ago. And according to a study published by Jim O'Shaugnessy in Barron's two years ago, the basic High Yield Ten approach has returned an annualized 14.7% from 1928 through 1995. (We know it's certainly performed above that level since 1995.) Beating the Dow (the five lowest-priced stocks of the high yield ten) has returned an annualized 16.5% over the same stretch. The Standard & Poor's 500 Index has returned 11.7%.

That's roughly seventy years of history for the simplest of all stock investment strategies. Call me a simpleton (I'll take it as a compliment in this regard), but I'm with Jim on this one. Unless someone repealed the basic principles of business and economics, I don't see any credible evidence that the approach won't continue to work as a terrific long-term strategy. Sure it's subject to ups and downs; what strategy isn't? Despite the gooroos' efforts to muck up anything simple and effective, the plain fact remains that high-yield investing works for large-cap industrial stocks. Let the King's court say, "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   -  15/16  51.44 
 IP   -   7/8   52.06 
 MO   -   1/2   38.75 
 EK   -1  1/2   71.94 
 
 
                    Day   Month    Year 
         FOOL-4   -1.71%   2.09%  11.89% 
         DJIA     -0.86%  -0.96%  13.51% 
         S&P 500  -0.89%  -1.50%  12.85% 
         NASDAQ   -1.16%  -1.78%  16.86% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     52.06    20.72% 
  12/31/97  291 Union Carb    42.94     51.44    19.80% 
  12/31/97  206 Eastman Ko    60.56     71.94    18.78% 
  12/31/97  276 Philip Mor    45.25     38.75   -14.36% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15046.06  $2582.94 
  12/31/97  291 Union Carb 12494.81  14968.31  $2473.50 
  12/31/97  206 Eastman Ko 12475.88  14819.13  $2343.25 
  12/31/97  276 Philip Mor 12489.00  10695.00 -$1794.00 
  
  
                              CASH    $415.96 
                             TOTAL  $55944.46