<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (May 28, 1998) -- A sharp-eyed web reader wrote to me this morning after noticing that the Foolish Four portfolio often starts the year slowly and then gathers momentum. Wouldn't it make sense, he then asked, to buy the stocks today that were in the rankings several months ago to skip that slow start?

It's a very logical question. Unfortunately, I don't know if it would be that easy, but it's certainly something to look at when Sandy's monthly database is fully available.

Here's why I'm a bit suspicious, however. As you undoubtedly know, the High-Yield Dow stocks are seen as out-of-favor or bargain stocks relative to the rest of the Dow components. What this typically means is that the stocks are somewhere in the lower part of their normal cycle, alternating over months between over- and under-valued.

Our high-yield test doesn't give any indication of whether the stocks in the top ten spots are still going down and will become even better bargains soon, as was the case with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> at the beginning of last year, or whether the stocks have already bottomed out and are already beginning their recovery. And in any given year, it's probable that some of the high-yield stocks will be descending still while the rest have already begun to rise.

Delaying the purchase until six months after the rankings might well work wonders for those stocks which are still on their way down to their bottoms. You'd skip some of the weak period and perhaps buy the stocks even lower than when they entered the rankings. But for the stocks identified by the ranking which have already begun to recover, such a plan gives up six months' worth of profits.

Absent a reliable method for identifying which of the stocks in the high-yield rankings are still losing ground and which have begun to rise, I don't think a delayed purchase plan is going to be a significant aid to the High-Yield investor.

But, you know, I've been wrong before, and I'll be wrong again. So whenever the data's available, let's take a look and see what the actual result would have been. That's the fun of theorizing. 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   -   1/8   50.38 
 IP   -1  3/16  46.94 
 MO   +   5/16  37.31 
 EK   +   5/16  70.69 
 
 
                    Day   Month    Year 
         FOOL-4   -0.43%  -2.37%   7.00% 
         DJIA     +0.38%  -1.03%  13.43% 
         S&P 500  +0.49%  -1.28%  13.10% 
         NASDAQ   +0.75%  -3.95%  14.28% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  291 Union Carb    42.94     50.38    17.32% 
  12/31/97  206 Eastman Ko    60.56     70.69    16.72% 
  12/31/97  289 Int'l Pape    43.13     46.94     8.84% 
  12/31/97  276 Philip Mor    45.25     37.31   -17.54% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  291 Union Carb 12494.81  14659.13  $2164.31 
  12/31/97  206 Eastman Ko 12475.88  14561.63  $2085.75 
  12/31/97  289 Int'l Pape 12463.13  13564.94  $1101.81 
  12/31/97  276 Philip Mor 12489.00  10298.25 -$2190.75 
  
  
                              CASH    $415.96 
                             TOTAL  $53499.90