<THE FOOLISH FOUR>

Keep It Simple
by Robert Sheard

LEXINGTON, KY. (August 20, 1998) -- A question that comes up from time to time with the Dow Approach (and any such mechanical model) is whether one should alter the rankings on occasion to pick a stock ranked lower or to skip a stock that one has doubts about.

And that's a natural question. After all, with this model every stock in the rankings looks bad to someone; that's why their relative dividend yields are high. And it's obviously the case that not every stock pick in such a model works out well.

But I'd say that's equally true of everyone's intuition about stocks as well. There have been numerous examples of such cases just in the three-odd years we've been following the Foolish Four online. Perhaps the classic example was from just last year.

You couldn't give away shares of AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> at the beginning of last year. There was an endless stream of posts proclaiming its demise, that it was dead money at best, that the reform bill would put the company under. And for a couple of months early in 1997, it looked that way to me, too. But by year end, the company had spun off several divisions (one of which, Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, is now the poster child for the Monster Stock Association), slashed costs dramatically, and settled their top-officer woes. All of that led to a gain of better than 50% by the end of the year. Yet you couldn't have seen it coming in January, although I'm sure there are any number of gooroos willing to claim they did in retrospect.

Stocks like Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> in 1995, Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> in 1994, and 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> and DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> in 1996 all scored fabulous gains for the Foolish Four after not looking particularly attractive at the time they joined the model. But that's exactly the point of this model. You're buying stocks no one else wants and then waiting patiently for them to get their acts together. You get them at bargain prices and have some assurance through their ongoing dividends that they're financially sound enough not to go belly up.

In other words, I've learned to trust the objective rankings far quicker than my own intuition, which is about as good as everyone else's, i.e., worthless. If you're using this approach because you've been persuaded by its long-term history of market outperformance and its simplicity, why muck that up with a bunch of second guessing and emotional hand-wringing?

If you're the kind of investor who has to tinker around the edges, by all means tinker, but do so with the realization that you're no longer using the model. Too many investors want to make "just this exception" and then blame the model when it doesn't pan out right away. The best rule I can think of for investors is to keep it simple. The more complicated you make it, the more likely you are to make a mistake.

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.]

08/20/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   3/16  46.38 
 IP   -   7/16  42.38 
 MO   +   7/16  43.13 
 EK   -  13/16  86.06 
  
 
 
                    Day   Month    Year 
         FOOL-4   -0.40%  -1.51%  12.26% 
         DJIA     -0.94%  -3.06%   8.89% 
         S&P 500  -0.59%  -2.59%  12.49% 
         NASDAQ   -0.56%  -2.13%  16.69% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     86.06    42.11% 
  12/31/97  291 Union Carb    42.94     46.38     8.01% 
  12/31/97  289 Int'l Pape    43.13     42.38    -1.74% 
  12/31/97  276 Philip Mor    45.25     43.13    -4.70% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17728.88  $5253.00 
  12/31/97  291 Union Carb 12494.81  13495.13  $1000.31 
  12/31/97  289 Int'l Pape 12463.13  12246.38  -$216.75 
  12/31/97  276 Philip Mor 12489.00  11902.50  -$586.50 
  
  
                              CASH    $754.73 
                             TOTAL  $56127.61