<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 18, 1998) -- One thing the Motley Fool is no stranger to is criticism, and when discussing any theory or philosophy, criticism is both welcome and necessary. The underpinning of any real discussion is a "great conversation" -- the genuine exchange of ideas.

Recently, though, a number of people have criticized the Foolish Four on false assumptions. The one that baffles me the most is the claim that the Foolish Four isn't working well any more. So in order to straighten out what shouldn't be open to debate (measurable returns), let's look at the performance of the Foolish Four in the 1990s (a period which includes the Foolish Four's worst and best years in decades).

The returns for this model and the benchmark Standard & Poor's 500 Index are based on end-of-year starting points. Dividends are included in both sets of returns, but no allowance has been made for taxes or trading costs. 

 
 Year    Foolish   S&P 500 
            Four     Index 
 1990     -17.6%     -3.2% 
 1991      81.6%     30.6% 
 1992      29.9%      7.8% 
 1993      26.2%     10.1% 
 1994       4.7%      1.6% 
 1995      30.6%     37.5% 
 1996      24.2%     23.3% 
 1997      22.3%     33.2%
If you simply look at the last three years and notice that the S&P 500 Index has outpaced the Foolish Four in two of those three years, you might be tempted to argue that the approach doesn't work any longer. But be wary of any such short-term result. Even going back just to the beginning of the decade -- itself a very brief period in the history of this approach -- will demonstrate that the long-term results for the Foolish Four are generally better than the index's. Despite losing to the index in three of the last eight years, the Foolish Four have returned an annualized 22.6% while the S&P 500 Index has returned an annualized 16.7%.

Some might argue that the relative outperformance for the Foolish Four has slipped. Instead of beating the index by 8.7 percentage points a year as it has from 1971 through 1997 (22.0% vs. 13.3%), the Foolish Four in the 90s is ONLY leading the index by 5.9 percentage points per year.

Now we can argue profitably about what's likely to happen in the future based on economic trends, tax law changes, company policies on paying out earnings in dividends, and the like. But we need at least to be willing to put short-term relative "weak" performance in the larger context of the model's long-term performance. It's simply not true that the approach has not worked well. Its performance in the 1990s is actually better in terms of raw percentage gains than its longer-term average returns (since 1971). If you have questions about the individual years' returns, please see the Dow Spreadsheet we offer through FoolMart. It includes annual data from 1961 through 1997. 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  1/8   53.56 
 IP   -   9/16  52.69 
 MO   +   1/4   35.63 
 EK   +1        70.50 
 
 
  
                    Day   Month    Year 
         FOOL-4   -0.39%   1.44%  11.17% 
         DJIA     -0.50%  -0.14%  14.45% 
         S&P 500  -0.26%  -0.54%  13.95% 
         NASDAQ   -0.82%  -1.97%  16.63% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  291 Union Carb    42.94     53.56    24.75% 
  12/31/97  289 Int'l Pape    43.13     52.69    22.17% 
  12/31/97  206 Eastman Ko    60.56     70.50    16.41% 
  12/31/97  276 Philip Mor    45.25     35.63   -21.27% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  291 Union Carb 12494.81  15586.69  $3091.88 
  12/31/97  289 Int'l Pape 12463.13  15226.69  $2763.56 
  12/31/97  206 Eastman Ko 12475.88  14523.00  $2047.13 
  12/31/97  276 Philip Mor 12489.00   9832.50 -$2656.50 
  
  
                              CASH    $415.96 
                             TOTAL  $55584.84