<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 12, 1998) -- One of the problems with looking at anything too closely is that the act of examination tends to inflate the sense of importance attached to the observed object. That's certainly the case for our simple Dow High-Yield Approach.

We've developed such an alphabet soup of variations and slants on the basic approach that new investors reading through all the material are often overwhelmed. This is a mistake we're hoping to correct with some selective Dow area revisions.

It brings up another point about overall portfolio management that supports my view that you're better off with a full portfolio of fifteen to twenty stocks than relying solely on the Foolish Four for your entire investment approach.

Should one drop General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> from the approach because it's been pretty dismal over the years? Should one drop the top stock when using the RP Variation? Should one double up on the weights of any positions? Should one start in January and use a 12-month cycle or another time of the year with an 18-month cycle?

All of these questions and more can be extremely important when 25% of your portfolio value is riding on each of only four stocks. A mistake can significantly affect your annual results. (And, of course, predicting those mistakes is impossible.)

But if the Foolish Four (or RP4, or what have you) is just a core within a much larger portfolio, the importance of such questions is greatly diminished. Each one of your stocks only accounts for about 5% of your portfolio, so a mistake or a tremendous victory in a single position doesn't have the same influence on your overall portfolio. As long as you're picking more winners than losers over the long haul, you're a successful manager.

I'm not much of a fan of fishing, but the process seems to me a lot like angling in the sense that if you make a larger number of casts, your odds of catching a fish increase. You're not going to rely on just four or five casts and expect to take home your limit. You'll make a lot of casts to increase your odds of striking where the fish are biting. The same is true of a diversified portfolio. You want to make enough casts (hold enough positions) that a small number aren't going to make or break you.

Now I'm not suggesting one takes it to the opposite extreme and buys every stock around. Then you're just buying the whole lake and draining it. You'll get all the winners (all the fish), but your ratio of winners to the overall lake won't be very good.

Strike a balance and develop a full portfolio, and the individual variation you choose for your Dow stocks becomes a lot less important. All of the Dow variations have beaten the market over time. Pick the one you're the most comfortable with and ignore it while you concentrate on fleshing out the rest of your holdings. Have a Foolish weekend.

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 - 3/8 47.31 IP + 1/8 44.94 MO + 3/8 37.25 EK + 7/16 69.88

Day Month Year FOOL-4 +0.23% -2.66% 3.69% DJIA +0.26% -0.73% 11.72% S&P 500 +0.39% 0.74% 13.23% NASDAQ -0.27% -1.90% 11.12% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 69.88 15.38% 12/31/97 291 Union Carb 42.94 47.31 10.19% 12/31/97 289 Int'l Pape 43.13 44.94 4.20% 12/31/97 276 Philip Mor 45.25 37.25 -17.68% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 14394.25 $1918.38 12/31/97 291 Union Carb 12494.81 13767.94 $1273.13 12/31/97 289 Int'l Pape 12463.13 12986.94 $523.81 12/31/97 276 Philip Mor 12489.00 10281.00 -$2208.00 CASH $415.96 TOTAL $51846.09