<THE FOOLISH FOUR>

20/20 Won't Cut It
by Ann Coleman
(TMF AnnC)

Reston, VA. (September 2, 1998) -- Hindsight is 20/20, right? It's easy to see what you should have done when looking back.

Some investors spend a lot of time thinking about what they woulda, shoulda, or coulda done. (Confess -- hasn't it, at least once, crossed your mind that you should have sold in July? Obviously, the market was due for a fall!)

I spend a lot of time playing around with numbers and looking through the Dow Dividend Spreadsheet (available in FoolMart) for different ways to look at the performance of the Dow stocks over the last few decades. One thing is very clear: when following a strategy like the Foolish Four, hindsight is best viewed through a wide-angle lens.

We offer several general guidelines for following the strategy -- and all of them are WRONG most of the time. For example, we say that the highest returns have been achieved for portfolios starting/renewing January 2. But if you look at individual years, that was only true in 5 of the last 25 years. In fact, January placed 1st, 2nd, or 3rd in only 11 of the last 25 years. (Next time we will look at those numbers in the light of statistical significance. Don't miss it -- but you might want to have a cup of coffee first.)

The same is true for the holding periods. A one (or possibly two) year holding strategy has performed the best over the past three decades. But for any single year, the chances are that a different holding period would have been better.

Still there? If you haven't already raced for the phone to bail on the Foolish Four, here's where the wide-angle lens comes in. Looking at any one year tells you nothing about how any strategy performs over time. So if you start a Foolish Four portfolio next January and it doesn't do as well as your friend's who started in July, rest assured that nothing unusual is going on -- it's not a sign that the strategy has failed or isn't "working" any more. In fact, it's Standard Operating Procedure. And it is SOP for the strategy to underperform the Standard & Poor's 500 Index in some years and to lose money occasionally.

Just not very often.

It's also SOP for the strategy to generate returns of 40% or higher in some years. That is the secret of long term investing. You take the good with the bad, and over time, the good times far outweigh the bad.

Speaking of bad, the chart in this column on Monday that compared the S&P's Bad Years with the subsequent Foolish Four performance confused a fair number of folks. I copied the data from a spreadsheet that reports returns as a percentage of the initial amount (i.e., if you end the year with the same amount you started with, you have 100% of your starting value. If you end with 25% more than you started with you have 125% of your starting value. That's how a return of 85% qualified as a "bad year." You ended the year with 15% less than you started with.) Since we don't normally report returns in that format, I should have converted it by subtracting 100% from each number. Here is a corrected version of the chart: 

 
 Year  Foolish    S&P 
          Four                                       
 1973  25.74%   -14.66% Bad year 
 1974   5.25%   -26.47% Really bad year 
 1975  68.71%    37.20% Second best year for the F4 (since 1973) 
 ~~~~ 
 1977   5.32%   -7.18%  Crummy year 
 1978   9.89%    6.56%  Not such-a-much for the F4, either 
 ~~~~ 
 1981  -4.63%   -4.91%  Lousy year 
 1982  41.58%   21.41%  Fourth best year for the F4 
 1983  41.74%   22.51%  Third best year for the F4 
 ~~~~ 
 1990 -21.12%   -3.17%  Miserable year 
 1991  81.61%   30.55%  Best year for the F4

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/02/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -  13/16  40.88 
 IP   +   7/16  38.25 
 MO   -   1/16  42.38 
 EK   +2 11/16  82.63 
  
 
 
                    Day   Month    Year 
         FOOL-4   +0.82%   3.49%   4.84% 
         DJIA     -0.58%   3.23%  -1.59% 
         S&P 500  -0.37%   3.45%   2.07% 
         NASDAQ   +1.13%   6.25%   1.43% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     82.63    36.43% 
  12/31/97  291 Union Carb    42.94     40.88    -4.80% 
  12/31/97  276 Philip Mor    45.25     42.38    -6.35% 
  12/31/97  289 Int'l Pape    43.13     38.25   -11.30% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17020.75  $4544.88 
  12/31/97  291 Union Carb 12494.81  11894.63  -$600.19 
  12/31/97  276 Philip Mor 12489.00  11695.50  -$793.50 
  12/31/97  289 Int'l Pape 12463.13  11054.25 -$1408.88 
  
  
                              CASH    $754.73 
                             TOTAL  $52419.86