<THE FOOLISH FOUR>

Timing is everything...
by Ann Coleman
(TMF AnnC)

Reston, VA. (Oct. 12, 1998) -- The nature of the Foolish Four's stock selection methods makes for some rather strange situations at times. Recall that the first step is to select the ten highest yielding stocks. Then you rank those stocks by price and buy the cheapest four (unless the lowest-priced stock is also the highest yielder, in which case you dump it and buy the next four lowest-priced stocks. Got that? Whew!)

The four stocks you buy are picked only from the list of high yielders, but that list can change daily and the stocks that one person buys can be very different from those that another buys the very next day -- even when the prices and yield don't change much.

Here's how: Although the strategy needs high-yielding stocks, it makes little sense to try to differentiate between stocks based on very small differences in yield. So when there is a tie for 10th place, i.e. for either making the list or not, we break the tie by picking the cheapest of the tied stocks, not by going for a more precise yield figure.

[Note: In Beating the Dow, Michael O'Higgins only looked at one decimal place. Yields were written 4.1%, 3.6%, 2.7% etc. and that was that. We carry the yield to two decimal places, but it is arguable that even that is too precise. The folks at the mutual funds and pension funds who are ultimately lured back to these downtrodden stocks by their high yields are unlikely to get excited over small differences. I'm pretty sure that when choosing between a stock with a 2.783% yield vs. one with a 2.787% yield, other factors (multitudes of them) come into play. So we limit our precision to two decimal places, and if you want to limit it to one, feel free.]

Now, I don't know this for a fact, but it seems like, even with two decimal places, there are an awful lot of ties for 10th place. I suspect that if you looked closely, you would see that the mode (most frequently occurring yield) tends to occur right around this spot. At any rate, we get these ties, and that sets up the following situation:

Day one. Stocks A and B are tied for tenth place. Stock A is the cheapest, so it goes on the list, and because it is a low-priced stock, it becomes the number-one Foolish Four pick.

Day two, Stock B drops in price slightly, which increases its yield by 1/100th of a percent. Now there is no longer any tie. Stock B is on the High Yield 10 list, and stock A is completely out of consideration. So on day two, the Foolish Four list changes even though the relative prices have changed very little.

Day three: Stock B recovers in price, decreasing its yield, and drops off the list; Stock A goes back on the list and back into the Foolish Four. Not surprisingly, people start to write in asking, "What's going on with the Foolish Four?"

If A and B were tied for third or eighth or sixth place, such minor changes in yield would not matter. Once you are on the high yield list, only price is considered when selecting the Foolish Four. You can still have a tie in the prices, but that doesn't seem to happen as often, and it is more easily understood than having a stock totally disappear from the list when prices haven't changed much. Or appear and disappear every other day!

What does all this mean? Probably not much. All of the stocks on or near the High Yield 10 list are reasonably good choices. The beauty of the Foolish Four is that it is a "good enough" approach. We aren't trying to predict the absolutely best stocks to buy. We are just trying to select a few good possibilities from among many. Don't sweat the small stuff!

Current Dow Order | 1998 Dow Returns

10/09/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   9/16  40.31 
 IP   +   1/16  46.06 
 MO   +   5/8   48.25 
 EK   +1  1/2   83.56 
 
 
                    Day   Month    Year 
         FOOL-4   +0.60%   1.64%  12.66% 
         DJIA     +1.29%   2.03%   1.18% 
         S&P 500  +1.36%  -1.90%   2.81% 
         NASDAQ   +3.59%  -8.72%  -1.55% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     83.56    37.98% 
  12/31/97  289 Int'l Pape    43.13     46.06     6.81% 
  12/31/97  276 Philip Mor    45.25     48.25     6.63% 
  12/31/97  291 Union Carb    42.94     40.31    -6.11% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17213.88  $4738.00 
  12/31/97  289 Int'l Pape 12463.13  13312.06   $848.94 
  12/31/97  276 Philip Mor 12489.00  13317.00   $828.00 
  12/31/97  291 Union Carb 12494.81  11730.94  -$763.88 
  
  
                              CASH    $754.73 
                             TOTAL  $56328.61