<THE FOOLISH FOUR>

The Foolish Four
... and why we like it
by Ann Coleman
(TMF AnnC)

Reston, VA. (Sept. 16, 1998) -- In Monday's column we discussed the most conservative of the strategies we follow in the Foolish Four area -- the High Yield 10, a.k.a. the Dogs of the Dow. The High Yield 10 strategy is attractive because it churns out higher returns than a Standard & Poor's 500 Index fund, and the returns are more consistent.

Even though it beats an index fund, the High Yield 10's conservative returns are far below those of the Foolish Four. The Foolish Four is a strategy that selects 4 of the lowest priced stocks from the High Yield 10 list. Over the past 25 years, the S&P has returned 13.32% while the HY10 has averaged annual returns of 17.47%, compared to the Foolish Four's 21.97%.

Over the long term, that kind of difference can add up. Say you had started your investing career on December 31, 1972, putting $10,000 each into three portfolios: An S&P index fund, the High Yield 10, and the Foolish Four. If you never added another penny, as of December 31, 1997, here's how your portfolios would have grown: 

 
 S&P Index Fund:     $215,208.12 
 High Yield 10:      $585,606.67 
 Foolish Four:     $1,425,651.37

By the way, those returns don't include commissions, mutual fund fees or taxes. We will discuss those effects later. The idea here is to compare the relative returns over a long time period.

You can probably guess why we like the Foolish Four. With returns like those, what's not to like?

Well... there is more to the story than high returns. With higher returns comes greater variability. That 22% average return doesn't happen every year like a nice, secure interest payment. For example, in 1990, the strategy didn't go up 22%. Instead, while the S&P lost a little over 3%, the Foolish Four plummeted almost 18%.

That's a shot to the heart! But then in 1991, a recovery year in which the S&P went up 31%, the Foolish Four soared 82%.

I've picked on the most dramatic example of the variability of the returns to illustrate why some people really are better off with ol' Slowpoke, the High Yield 10, which dropped 10% in 1990 and rose 44% in 1991. If your Insomnia Index Quotient is fairly low, though, and especially if you have a long time horizon, the Foolish Four's higher returns are very attractive.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/16/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +   3/8   39.00 
 IP   +   3/16  44.50 
 MO   +   3/4   45.63 
 EK   +3  1/16  84.88 
  
 
 
                    Day   Month    Year 
         FOOL-4   +1.85%   8.66%  10.08% 
         DJIA     +0.81%   7.30%   2.30% 
         S&P 500  +0.76%   9.19%   7.73% 
         NASDAQ   +0.70%  12.72%   7.61% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     84.88    40.14% 
  12/31/97  289 Int'l Pape    43.13     44.50     3.19% 
  12/31/97  276 Philip Mor    45.25     45.63     0.83% 
  12/31/97  291 Union Carb    42.94     39.00    -9.17% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17484.25  $5008.38 
  12/31/97  289 Int'l Pape 12463.13  12860.50   $397.38 
  12/31/97  276 Philip Mor 12489.00  12592.50   $103.50 
  12/31/97  291 Union Carb 12494.81  11349.00 -$1145.81 
  
  
                              CASH    $754.73 
                             TOTAL  $55040.98