<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 4, 1998) -- The idea of the Court Fool is an ancient one, of course, but it's not the only tie we have as 20th-century Foolish investors with the ancient world.

Once upon a time (in the 13th century), an Italian named Leonardo Fibonacci brought to us the first model of the Compounding Clown. Fibonacci was trying to work out how many pairs of rabbits can be produced from a single pair of rabbits, if every month each pair produces a new pair (one male, one female), and all subsequent offspring follow the same pattern. And in his perseverance with numbers, the result we have is now known as a Fibonacci Series.

Simply explained, the Fibonacci Series begins with any two consecutive numbers. The third number in the series is the sum of the first two, and each succeeding figure in the series is the sum of the preceding two figures.

For example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

What Fibonacci and scholars since his time have noticed is that his discovery appears throughout nature in various guises. Some examples: The ratio of scales distributed in opposing spirals around a pine cone is 5:8. The ratio of bumps around a pineapple is 8:13. The ratio of the number of seeds in the center of a sunflower is 21:34. (These are known as adjacent Fibonacci pairs.)

After you get past the number 3 in the Fibonacci Series, the ratio between any two numbers is approximately 1.618 to 1. For you math buffs, that's the ratio of the Golden Section, the division of a line segment into two parts so that the whole segment is to the larger part as the larger part is to the smaller. This ratio is ubiquitous in architecture and even very prominent in painting (e.g., the facade of the Parthenon and in paintings by Leonardo and others).

"What's this got to do with investing?" I hear you cry. Well, the ratio works so well for nature and culture and art, it has to be relevant for stocks somehow, doesn't it? And whether by hook or by crook, I'll make it so.

It just so happens that the historical returns for the Dow High-Yield 10 for the last three decades (three being a magical and mystical number here) would have put you smack into a Fibonacci Series. With an annualized return of 17.4%, every three years one's High-Yield 10 portfolio would have increased 61.8%, exactly the natural ratio Fibonacci discovered, creating a new adjacent Fibonacci pair with each third year in the series of investment returns. For example, if one started with $5,000, three years later, the total would be $8,000, then three years later $13,000 and so on. It's exactly the compounded rate of growth discovered throughout the natural world.

How could such an amazing replication of nature within the stock market be anything other than Foolish? (Translation: I found a cool but basically irrelevant correlation and worked hard to make a whole column out of it.) Have a Foolish evening!

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 + 7/16 49.88 IP + 5/8 47.63 MO - 3/8 36.25 EK - 11/16 69.00

Day Month Year FOOL-4 +0.12% -0.65% 5.82% DJIA +0.76% -0.33% 12.17% S&P 500 +1.12% 0.37% 12.82% NASDAQ +1.60% -0.50% 12.71% Rec'd # Security In At Now Change 12/31/97 291 Union Carb 42.94 49.88 16.16% 12/31/97 206 Eastman Ko 60.56 69.00 13.93% 12/31/97 289 Int'l Pape 43.13 47.63 10.43% 12/31/97 276 Philip Mor 45.25 36.25 -19.89% Rec'd # Security In At Value Change 12/31/97 291 Union Carb 12494.81 14513.63 $2018.81 12/31/97 206 Eastman Ko 12475.88 14214.00 $1738.13 12/31/97 289 Int'l Pape 12463.13 13763.63 $1300.50 12/31/97 276 Philip Mor 12489.00 10005.00 -$2484.00 CASH $415.96 TOTAL $52912.21