<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 22, 1998) -- It's Monday. Time to head to work, so let's cut through the noise about the High Yield/Low Price Dow approach and talk facts.

The Dow first held 30 industrial stocks in 1928, so 1929 is the first full year of data for this model. In the ensuing 69 ½ years, the Beating the Dow five-stock approach has made a profit 75% of the time (the five lowest-priced stocks among the ten highest yielders).

The worst period was the first three years (the Great Depression), where the Beating the Dow approach lost 65% of its value. What a start! And yet, four years later it had regained all the loss. There's no doubt that a seven-year flat return isn't very enticing, but it's nothing like the dreary cases the bears argue, that it takes decades for the individual investor to recover from such setbacks. In fact, other than the recovery from the Depression, never did it take longer than two years for the Beating the Dow model to recover from any loss, and the great majority of them were made up, plus some, in a single year.

The compound annual growth rate for the S&P 500 Index from 1929 to the present is right at 10% per year. The Beating the Dow model over that same period has returned 14% a year. The value of four percentage points a year over several decades is enormous. For example, skipping the effects of taxation and inflation (which would, of course, affect both investments), $100 invested at the beginning of 1929 in the S&P 500 Index would have been worth $71,795 at the end of last year. The same $100 in the Beating the Dow model for those 69 years would have grown to $844,179. Those four percentage points make a huge difference, don't they?

The random walkers and the efficient marketers and the anti-backtesters and all the other schools of thought who claim one can't beat the market and we're fools to try, or that the Dow approach doesn't really work (or that it worked in the past but won't in the future), still can't argue away the simple fact that with less than 30 minutes of research a year, anyone using these approaches has trounced Wall Street. And there's no credible reason to believe the market's going to be different in the future.

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.]

06/22/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   3/8   47.06 
 IP   -   3/8   43.63 
 MO   +   5/16  39.19 
 EK   +   1/8   67.25 
  
 
 
                    Day   Month    Year 
         FOOL-4   -0.20%  -3.52%   2.78% 
         DJIA     -0.02%  -2.12%  10.15% 
         S&P 500  +0.23%   1.13%  13.68% 
         NASDAQ   +1.38%   1.52%  15.00% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     67.25    11.04% 
  12/31/97  291 Union Carb    42.94     47.06     9.61% 
  12/31/97  289 Int'l Pape    43.13     43.63     1.16% 
  12/31/97  276 Philip Mor    45.25     39.19   -13.40% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  13853.50  $1377.63 
  12/31/97  291 Union Carb 12494.81  13695.19  $1200.38 
  12/31/97  289 Int'l Pape 12463.13  12607.63   $144.50 
  12/31/97  276 Philip Mor 12489.00  10815.75 -$1673.25 
  
  
                              CASH    $415.96 
                             TOTAL  $51388.02