<THE FOOLISH FOUR>
Fool Four Hedge Fund
by Bob Price
(TMF Sandy)
Houston, TX. (Oct. 13, 1998) -- Most of you have probably heard about the Long-Term Capital Management hedge fund, the fund that had been making 60% a year until it got hit hard by the turmoil in foreign markets. If you didn't, click here.
Amazing what you can do with 20-1 leverage, isn't it? So I thought, why not a Foolish Four hedge fund? We get 20-1 leverage (don't bother me with any silly details like how) and see how we do.
If we got 20-1 leverage on the Fool 4 or RP4 -- it doesn't make a whole lot of difference -- over the last 37 years, we would have averaged around 400% per year. Not too bad, eh? Wade Cook, look out!
Seasoned Dow system observers are skeptical already. "But the average is useless," they say. "What was the compound annual growth rate?"
Non-seasoned observers are asking, "What would I have gotten if I invested money in this, expressed as an annual rate?"
(Both are the same question, of course).
You caught me. The only problem is, it's an average. In each case, you would have been wiped out (lost more than you had) four times! This is a testimony to the dangers of leverage. While a little leverage (for example, a modest amount of margin) might help your returns, too much carries the risk of a wipeout. And Alan Greenspan isn't going to bail us out.
Are You Leveraged?
While you may say you have no leverage, you might be surprised. If you have credit card debt, for instance, or any debt that you could pay off with money you've invested, in effect you're leveraged to that extent. In this time when markets have been going down, that's worth keeping in mind. One of the reasons we love these Dow approaches is that they tend to do better in bear markets than many other strategies. But they aren't bear-proof, by any means. So it still pays to follow the 13 Steps to Investing Foolishly in order.
This Just In...
In other news, one of our readers noticed that the Dow Dividend Spreadsheet we sell in FoolMart (has everyone bought a couple?) has an error. There's a first time for everything, I guess. Well, a first time this week, anyway.
In 1987, we show Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> and Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> as members of the Dow. They weren't -- not yet, anyway. We should have shown Inco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: N)") else Response.Write("(NYSE: N)") end if %>and Owens-Illinois <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OI)") else Response.Write("(NYSE: OI)") end if %>. Boeing and Coke didn't join the Dow 30 until March of 1987.
Sometimes it's better to be lucky than good, though. (We try to be both when possible.)
These corrections brought the return of the Dow 30 up. However, they made absolutely no difference to the returns of any of the strategies we follow -- even the BTD 10. Why? In the erroneous sheet, neither Boeing nor Coke made any of our buy lists. And Inco and Owens Illinois didn't make any buy lists in the corrected sheet. The loud sigh of relief you hear is from Ann Coleman, who's trying to get all the correct annual returns posted around our sites.
Current Dow Order | 1998 Dow Returns
10/13/98 Close
Stock Change Last -------------------- UK - 9/16 39.75 IP --- 46.06 MO - 1/4 48.00 EK -11 9/16 72.00 |
Day Month Year
FOOL-4 -4.64% -3.08% 7.43%
DJIA -0.79% 1.22% 0.38%
S&P 500 -0.28% -2.18% 2.52%
NASDAQ -2.37% -10.89% -3.88%
Rec'd # Security In At Now Change
12/31/97 206 Eastman Ko 60.56 72.00 18.89%
12/31/97 289 Int'l Pape 43.13 46.06 6.81%
12/31/97 276 Philip Mor 45.25 48.00 6.08%
12/31/97 291 Union Carb 42.94 39.75 -7.42%
Rec'd # Security In At Value Change
12/31/97 206 Eastman Ko 12475.88 14832.00 $2356.13
12/31/97 289 Int'l Pape 12463.13 13312.06 $848.94
12/31/97 276 Philip Mor 12489.00 13248.00 $759.00
12/31/97 291 Union Carb 12494.81 11567.25 -$927.56
CASH $754.73
TOTAL $53714.04
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