<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (June 23, 1998) -- It's no secret that so far in 1998, the various Dow high-yield models have lagged the rest of the stock market. And the time-lapsed Dozens models are following suit.

If you're not familiar with the Dozens concept, it's a simple system for saving regularly and/or building a portfolio from scratch. The plan is to set up a portfolio with slots for twelve holdings -- one each month. As you save money, you fill out one of those monthly slots with each new purchase (a minimum of $1,000 per stock) and hold it one year.

Eventually, all twelve slots are filled and you simply update one stock each month. Your total trading costs for the year are limited to a maximum of 24 trades, which at a deep-discount rate of $8 per trade is only $192 a year. If you've kept to the guidelines regarding a minimum in each stock of $1,000, that represents a maximum cost ratio of 1.6%. It may take you a couple of years to build up to twelve different positions, but regular savings will get you there quicker than you might think.

I follow a number of different Dozens screens here and in our Workshop (see today's Workshop column for the results of some other Dozens models), but there's nothing to say all twelve of your stocks have to be selected with the same screen. You may very well like to mix two, even three or four different screens to choose your holdings.

The two Dow-related Dozens models I follow aren't doing so well this year. The Dow Dozen (which chooses the highest-ranked Unemotional Value stock each month that's not already in the portfolio) is on an annualized pace to record a gain of a dismal 3.6%. (That means that based on the monthly cash flow and the returns achieved so far, if this pace continues, the portfolio will achieve a total growth rate of only 3.6%.) By comparison, the S&P 500 Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, had one been investing in it each month rather than in the Dow Dozen stocks, is on a pace to record an annual gain of 22.9%.

The other Dow-related version, the Dow Racers, chooses the Dow stocks with the highest total return over the previous six months (a measure of Relative Strength). And while it's currently ahead of the high-yield Dow Dozen, it's only recording an annualized gain so far of 16.2% -- still trailing compared to the S&P Spyder. This is a big improvement, however. Earlier in the year, this model was actually losing money while the Standard & Poor's 500 was on an even more bullish pace. So things tend to turn quickly at these early stages in the year.

The first Dow Racers purchase was AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, selected at the end of December, and it's only up 4.7% in nearly six months. The second stock, chosen at the end of January, was Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>, which is up just 2.1% since.

The third stock, Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>, is showing a slight loss since being picked up at the end of February, down 0.1%. Offsetting a lot of that weakness is the fourth stock, Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, which has been riding consumer confidence and impressive same-store sales gains higher. It's up 14.2% in two and a half months.

At the end of April, the Dow racers added Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, which is up a decent but unspectacular 3.5% in about seven weeks. And the final stock added at the end of May was McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>, which is up 2.0% in its first three weeks.

Not a terrific Dow performance across the board so far, but as always, I caution you not to read too much into annualized gains on portfolios that are this young. With only half a year under our belts and only a half-dozen stocks in each, these numbers can skyrocket or plunge on short notice. The results will become much more meaningful as the portfolios flesh out their full dozen holdings and pass their first birthdays. 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.]

06/23/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +   3/8   47.44 
 IP   -   3/16  43.44 
 MO   +   3/8   39.56 
 EK   -   1/16  67.19 
  
 
 
                    Day   Month    Year 
         Day   Month    Year 
         FOOL-4   +0.28%  -3.24%   3.07% 
         DJIA     +1.35%  -0.80%  11.64% 
         S&P 500  +1.48%   2.63%  15.36% 
         NASDAQ   +2.14%   3.69%  17.46% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     67.19    10.94% 
  12/31/97  291 Union Carb    42.94     47.44    10.48% 
  12/31/97  289 Int'l Pape    43.13     43.44     0.72% 
  12/31/97  276 Philip Mor    45.25     39.56   -12.57% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  13840.63  $1364.75 
  12/31/97  291 Union Carb 12494.81  13804.31  $1309.50 
  12/31/97  289 Int'l Pape 12463.13  12553.44    $90.31 
  12/31/97  276 Philip Mor 12489.00  10919.25 -$1569.75 
  
  
                              CASH    $415.96 
                             TOTAL  $51533.59