<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 8, 1998) -- This column is ostensibly devoted to a single strategy for choosing high-yield industrial stocks, but as long time readers are aware, I stray from that limited focus on occasion to discuss related topics. Today I'll stray again, but my movement will be more of a step backward than a step away from the Dow Approach.

A more fundamental question many investors need to consider before they start laying down their money on the Foolish Four is why they should be investing in stocks rather than bonds, or certificates of deposit, or money market accounts, in the first place.

And to answer that question, I'll turn to an unofficial Fool, Peter Lynch. The introduction to my favorite of Lynch's three books, Beating the Street, is called "Escape from Bondage," and it presents Lynch's dismay with the amount of money invested in bonds as long-term investments. Rather than summarize his work in blander language, let me simply quote some of Lynch's best points:

"If you hope to have more money tomorrow than you have today, you've got to put a chunk of your assets into stocks. Maybe we're going into a bear market and for the next two years or three years or even five years you'll wish you'd never heard of stocks. But the 20th century has been full of bear markets, not to mention recessions, and in spite of that the results are indisputable: sooner or later, a portfolio of stocks or stock mutual funds will turn out to be a lot more valuable than a portfolio of bonds or CDs or money-market funds."

The most persuasive argument Lynch puts forth is a simple factual chart comparing stocks, bonds, t-bills and inflation, by decade, from the 1920s to the present. According to the 1997 Ibbotson SBBI Yearbook, bonds have outperformed stocks in only a single decade (the 1930s).

But as always, predicting such occurrences requires a clairvoyance none of us possesses. As Lynch puts it, "The investment geniuses among us could have put all their money into the S&P 500 stocks in the 1920s, switched in 1929 to long-term corporate bonds and held these throughout the 1930s, moved into small-company stocks in the 1940s, back into the S&P 500 in the 1950s, back to small companies in the 1960s and the 1970s, and returned to the S&P 500 in the 1980s. The people who followed that inspired strategy are now all billionaires and living on the coast of France. I would have recommended it myself, had I been clever enough to know beforehand what was going to happen. In hindsight, it's quite obvious.

"Since I've never met a single billionaire who made his or her fortune exactly in this fashion, I must assume that they are in short supply relative to the rest of us who exhibit normal intelligence. The rest of us have no way of predicting the next rare period in which bonds will outperform stocks. But the fact that it's only happened in one decade out of seven [now going on eight], the 1930s (the 1970s was a standoff), gives the dedicated stockpicker an advantage. By sticking with stocks all the time, the odds are six to one in our favor that we'll do better than the people who stick with bonds."

For the long-term investor, then, investing in anything except stocks with your hard-core savings (we're not talking about your immediate spending money or emergency funds) is flying in the face of the odds. All too often financial planners preach the need to diversify because of the risks involved in stocks, but that's ignoring the equally valid risk of giving up the much larger potential gains afforded stock investors. Opportunity costs must be considered as well, and historically, bonds, t-bills, and cash simply can't stand up to the long-term performance of stocks. 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   +   7/8   52.31 
 IP   +   5/16  52.38 
 MO   -   1/8   38.63 
 EK   -   7/16  71.50 
 
 
                    Day   Month    Year 
         FOOL-4   +0.39%   2.49%  12.33% 
         DJIA     +0.87%  -0.09%  14.50% 
         S&P 500  +1.19%  -0.33%  14.19% 
         NASDAQ   +1.59%  -0.22%  18.72% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  291 Union Carb    42.94     52.31    21.83% 
  12/31/97  289 Int'l Pape    43.13     52.38    21.45% 
  12/31/97  206 Eastman Ko    60.56     71.50    18.06% 
  12/31/97  276 Philip Mor    45.25     38.63   -14.64% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  291 Union Carb 12494.81  15222.94  $2728.13 
  12/31/97  289 Int'l Pape 12463.13  15136.38  $2673.25 
  12/31/97  206 Eastman Ko 12475.88  14729.00  $2253.13 
  12/31/97  276 Philip Mor 12489.00  10660.50 -$1828.50 
  
  
                              CASH    $415.96 
                             TOTAL  $56164.77