<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (July 31, 1998) -- In recent weeks I've discussed the Dozens strategies, both here and in the Workshop area. Usually, those scenarios are based on the idea of starting slowly and adding positions throughout the first year as one saves more money. But what about a case where you have enough money to establish the twelve positions already (at least $12,000)? How do you set up the rotation then?
The first year, as you make the transition to the twelve monthly positions, is going to be a little awkward, and you'll have a couple of short-term trades in all likelihood, but this doesn't have to be a huge burden. Let's look at one way to set up the portfolio.
In month one, rather than leaving 11/12 of your money in cash or the Standard & Poor's 500 Index for each month's purchase, go ahead and buy the twelve top-ranked stocks at the beginning, using the current rankings. Set up your dance card with twelve monthly slots and right now, fill in the first slot with whatever the highest-ranking stock is. Let's say of the twelve stocks you bought, International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> is the highest-ranking one. Fix that as your official stock for this month, even though you also bought eleven others. The remaining eleven stocks you bought will be "free agents."
A month later, get the new rankings and see what the highest-ranking stock is, other than International Paper since that's already officially in your portfolio. Let's say it's AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>. If AT&T's already one of those eleven free agents you bought at the beginning, as it's likely to be since it was purchased only a month earlier, you don't need to do anything but mark it onto your dance card in month number two's slot. You now have two official stocks, each with a different starting date (even though you actually bought them on the same day), and ten remaining free agents.
Now suppose in the third month the stock you're supposed to pick is a newcomer to the rankings and isn't among your free agents. In order to buy it, you'll need to sell one of your ten free agents. Choose the one that's performed the worst for you and sell. That way you're limiting the effect of short-term trading on the free agents you end up dumping in less than a year, and you're keeping your best performers. Now you've got three official stocks and nine free agents.
Continue this plan for the full year, after which time you'll have twelve official stocks, each with a starting date in a different month, and you can then begin making your regular monthly evaluation of your oldest stock. From that point on, everything would be held a year (and a day), thus qualifying for the lowest capital gains tax rates.
This setup approach would work whether you're using stocks all from a single screen or from a combination of screens. If you want to establish a dozens rotation with a lump sum now, go ahead and buy all twelve and then start making your rotations a month later. It's more tax efficient than parking the money in the S&P 500 Index Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, where you're guaranteed that each month's sale of Spyder shares will generate a short-term event. At least this way a few of the stocks in the early months are likely to be among the free agents you bought on day one and will save you the tax bite on those updates. It's also likely to outperform the Spyder method if historical averages hold up.
Next week, Fools, I'll be on vacation. Enjoy the new voices here, and I'll be with you again August 11.
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.]
07/31/98 Close
Stock Change Last -------------------- UK + 9/16 48.00 IP +1 44.63 MO - 5/16 43.81 EK -1 5/8 83.88 |
Day Month Year
FOOL-4 +0.06% 4.97% 13.98%
DJIA -1.59% -0.77% 12.33%
S&P 500 -1.95% -1.16% 15.48%
NASDAQ -2.46% -1.18% 19.23%
Rec'd # Security In At Now Change
12/31/97 206 Eastman Ko 60.56 83.88 38.49%
12/31/97 291 Union Carb 42.94 48.00 11.79%
12/31/97 289 Int'l Pape 43.13 44.63 3.48%
12/31/97 276 Philip Mor 45.25 43.81 -3.18%
Rec'd # Security In At Value Change
12/31/97 206 Eastman Ko 12475.88 17278.25 $4802.38
12/31/97 291 Union Carb 12494.81 13968.00 $1473.19
12/31/97 289 Int'l Pape 12463.13 12896.63 $433.50
12/31/97 276 Philip Mor 12489.00 12092.25 -$396.75
CASH $754.73
TOTAL $56989.86
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