<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (July 8, 1998) -- In today's Workshop column, I recap the returns generated so far in four of our Dozens portfolio models. I also track two Dozens models based on the thirty Dow stocks, so let's check in on them today.
What's a Dozens portfolio? It's a simple strategy that a regular saver might want to use to start fleshing out a full portfolio of twelve stocks (or twenty-four stocks, if you double the plan). In my models, I assume a $1,000 deposit goes into the portfolio each month to be invested in the highest-ranking stock not already in the portfolio (using the relevant screen for each model).
By the end of the first year, one would be holding a full Dozens model and then each month, the oldest stock (one year old) is replaced, if necessary, based on the new current rankings. That way you're limiting your trades to 24 a year at the most (which is affordable using $1,000 minimum positions and a deep-discount broker), your taxes are limited to the one-year capital gains rate (hold a year and a day, please), and you can add new money every month as you renew one stock.
It's a great plan for building a portfolio, and if you can't afford a new $1,000 every month, leave that slot open and fill it the following year. It may take a couple of years to get all twelve slots filled, but as long as you're saving what you can, you're doing things the right way. Another option you might consider is splitting the twelve slots among two or three different screening strategies. That may build a better balanced portfolio in the long run.
On to the results. The first model, the Dow Dozen, is based on the Unemotional Value rankings, which means after a few months, you'd have to start digging pretty far down the rankings list to get a new stock. Using an annualized (internal rate of return) calculation to account for the monthly cash flow, the Dow Dozen model is on a pace to record a gain of 15.0% in 1998. Nothing to brag about compared to the overall market.
I use a benchmark of the Standard & Poor's 500 Index Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, and assume a similar $1,000 monthly deposit in the Spyder shares. That approach is on a pace to record a gain of 34.9% in 1998.
The following are the Dow Dozen holdings, listed in the order they were acquired, beginning on the last trading day in December of 1997. The return figures are since the stocks were added to the respective portfolios, not since the beginning of 1998. Returns don't include dividends or taxes, but do account for commissions at $8 per trade.
22.3% Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>
-5.0% International paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>
-6.6% AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
12.3% Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>
5.5% General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>
-2.9% Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>
1.5% Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %>
The other Dow variation is what I'm calling the Dow Racers Dozen. This screen chooses the Dow stocks with the best total returns over the previous six months (a measure of relative strength). It, too, is trailing the Spyder benchmark model, recording an annualized pace of 18.7%. Here are the holdings for the Dow Racers:
-7.2% AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
0.4% Walt Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>
4.1% Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>
21.1% Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>
2.7% Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>
10.2% McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>
2.8% DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>
Not a terrific year for Dow stocks so far, but if you want to see some eye-popping Dozens returns, check out today's Workshop report.
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.]
07/08/98 Close
Stock Change Last -------------------- UK +1 54.50 IP + 5/16 43.88 MO -1 3/8 38.25 EK +1 74.31 |
Day Month Year
FOOL-4 +0.38% 1.60% 10.32%
DJIA +0.99% 2.49% 16.02%
S&P 500 +1.01% 2.87% 20.19%
NASDAQ +1.43% 2.15% 23.24%
Rec'd # Security In At Now Change
12/31/97 291 Union Carb 42.94 54.50 26.93%
12/31/97 206 Eastman Ko 60.56 74.31 22.70%
12/31/97 289 Int'l Pape 43.13 43.88 1.74%
12/31/97 276 Philip Mor 45.25 38.25 -15.47%
Rec'd # Security In At Value Change
12/31/97 291 Union Carb 12494.81 15859.50 $3364.69
12/31/97 206 Eastman Ko 12475.88 15308.38 $2832.50
12/31/97 289 Int'l Pape 12463.13 12679.88 $216.75
12/31/97 276 Philip Mor 12489.00 10557.00 -$1932.00
CASH $754.73
TOTAL $55159.48
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