<THE FOOLISH FOUR>

The Fool 9
by Bob Price
(TMF Sandy)

Houston, TX. (October 20, 1998) -- If you've had trouble holding your Fool 4 or RP4 position in the recent market dips, you may be considering the High Yield 10 approach. This approach, as you probably know, buys the 10 highest yielding Dow stocks each January and holds them for one year. This simple approach has outperformed the Dow Jones Industrial Average of 30 stocks over the years by about 25% per year or more. Over the last 37 and 27 years, it has done so with less volatility of returns. That is, the standard deviation of the returns of the High Yield 10 is less than that of the Dow 30.

Suppose you're willing to take on a bit more volatility than the Dow, but not the 20-30% more (as measured by standard deviation) that RP4 or the Fool 4 require. Do you have another option, maybe one that will do better than the High Yield 10? (Hint: would we be writing this if you didn't?)

Meet the Fool 9.

As you may know, our Fool 4 was originally Robert Sheard's UV4. You get it by picking the 10 highest yielding stocks then ordering them by price. If the lowest priced stock is the highest yielding stock, you eliminate it. Then you pick the 4 lowest priced (remaining) stocks.

The Fool 9 is done just the same, but with 9 stocks instead of 4. This approach has practically the same volatility (as measured by standard deviation) as the Dow 30 itself. However, it outperforms the Dow 30 (well, it had better!) and the High Yield 10, also.

Let's look at the numbers

Over the 37 years from 1961-1997 inclusive, the Dow 30 purchased on an equal dollar basis with dividends reinvested annually had a compound annual growth rate (CAGR) of 11.98%. The High Yield 10 was 15.12%, and the Fool 9 was 15.60%. That may not sound like much, but that means that each dollar in the HY10 became $183 over that period, whereas each dollar in the Fool 9 became around $213 over that period, so you have more than 16% increase in your total dollar return.

If you want to look at the 27 years from 1971-1997, the CAGR for the Dow 30 on an equal dollar basis was 13.6%, for the High Yield 10 was 17.4%, and for the Fool 9 was 18.11%. A dollar in the High Yield 10 became nearly $77, and a dollar in the Fool 9 became a bit over $89. Again, more than a 16% increase in the return on your original money over that period.

So, the Fool 9 is worthy of serious consideration if you want to have your money only in the Dow approaches and having it in just 4 stocks makes you nervous.

You can mix approaches, too, if you like -- buying, say, double portions of the RP4 and single portions of the other 5 stocks that make up the Fool 9.

What about RP9? Well, for some reason, that's a disappointing performer. Over the last 27 and 37 years, it underperformed the High Yield 10. So while RP4 is the best 4-stock plan of those we follow, RP9 isn't recommended.

Current Dow Order | 1998 Dow Returns

10/20/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +   1/4   41.88 
 IP   +   3/16  48.56 
 MO   +1  1/16  49.00 
 EK   +1 11/16  75.63 
 
 
                    Day   Month    Year 
         FOOL-4   +1.39%   1.19%  12.16% 
         DJIA     +0.47%   8.46%   7.56% 
         S&P 500  +0.14%   4.61%   9.63% 
         NASDAQ   -0.58%  -3.23%   4.38% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     75.63    24.87% 
  12/31/97  289 Int'l Pape    43.13     48.56    12.61% 
  12/31/97  276 Philip Mor    45.25     49.00     8.29% 
  12/31/97  291 Union Carb    42.94     41.88    -2.47% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15578.75  $3102.88 
  12/31/97  289 Int'l Pape 12463.13  14034.56  $1571.44 
  12/31/97  276 Philip Mor 12489.00  13524.00  $1035.00 
  12/31/97  291 Union Carb 12494.81  12185.63  -$309.19 
  
  
                              CASH    $754.73 
                             TOTAL  $56077.67