<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 15, 1998) -- Recently I discussed the Dogginess of the Foolish Four approach and how these are generally stocks no one else wants. In that piece, though, I also discussed Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> and the fact that, because it currently sports both the highest yield of all thirty Dow stocks and the lowest stock price of the ten high yielders, our system for picking the Foolish Four (also known as the Unemotional Value approach) would currently skip big MO.

What a number of readers have asked since, however, is why one should continue to hold a stake in MO if the system says not to buy it today. And I'm going to state up front that my answer may well be contradictory. As Walt Whitman said in Song of Myself,

Do I contradict myself?
Very well then I contradict myself,
(I am large, I contain multitudes.)

The most important point to remember is that the beauty of the Foolish Four approach is its simplicity and completely mechanical nature. No one knows what's in store in the short run for Philip Morris (or any other holding). By the end of 1998, it may well have turned out to be a decent stock. And then again, maybe not. But I maintain that once you've bought your holdings for the year, you've done the best you can do at the time and you shouldn't continue to second-guess the results.

Last year, a lot of readers wanted to dump AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> because it started the year going down and down. Yet by the end of the year, it was a 53% winner. It certainly didn't look possible in the first part of the year and at the time I, too, felt it might be a big drag on the portfolio. But one thing I've learned about these models in the three years I've written about them for the Fool is that they're more reliable than my intuition is.

But that doesn't mean that the situation hasn't changed since January when we added Philip Morris. At the time, the stock was the third-lowest-priced of the ten high yielders and wasn't waving red flags yet. Now it is in the red-flag position, though, and based on the long-term law of averages we've seen historically, it may not be a good purchase today. There's no guarantee, of course, but I believe in working with the best information you have at the time of your decisions, and then letting nature take its course. Some will call that lazy investing. So be it. I prefer to think of it as staying out of my own way. 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   +1  3/16  54.69 
 IP   -1  3/4   53.25 
 MO   -   7/8   35.38 
 EK   -1  3/16  69.50 
 
 
  
                    Day   Month    Year 
         FOOL-4   -1.15%   1.83%  11.60% 
         DJIA     -0.83%   0.36%  15.02% 
         S&P 500  -0.77%  -0.27%  14.25% 
         NASDAQ   -1.00%  -1.16%  17.60% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  291 Union Carb    42.94     54.69    27.37% 
  12/31/97  289 Int'l Pape    43.13     53.25    23.48% 
  12/31/97  206 Eastman Ko    60.56     69.50    14.76% 
  12/31/97  276 Philip Mor    45.25     35.38   -21.82% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  291 Union Carb 12494.81  15914.06  $3419.25 
  12/31/97  289 Int'l Pape 12463.13  15389.25  $2926.13 
  12/31/97  206 Eastman Ko 12475.88  14317.00  $1841.13 
  12/31/97  276 Philip Mor 12489.00   9763.50 -$2725.50 
  
  
                              CASH    $415.96 
                             TOTAL  $55799.77