<THE FOOLISH FOUR>

Index Independence
by Chris Rugaber
(TMF RFK)

Alexandria, VA. (October 22, 1998) -- On January 3, 1966, the Dow Jones closed at 968.54. It took almost six more years for the Dow to cross 1,000 on November 14, 1972. The 30-stock industrial index hovered at this level until roughly eleven years later, when the Dow Jones closed on January 3, 1983, at 1,027.04 and never dipped below 1,000 again. (It had in fact crossed the 1,000 mark in late 1982, but I'm just using the January 3rd, 1983 date to bring things full circle).

In other words, the Dow fluctuated around the 1,000 mark from 1966-1983, from Vietnam through Grenada, from the Beatles to Michael Jackson, from Lyndon Johnson to Ronald Reagan. The fluctuation was wide, ranging from as low as 577.6 in December 1974 to 1024.04 in April 1981. How well did the various Dow Dividend approaches do during this period? How could they have done very well at all, if the overall index was more or less flat for seventeen years?

Of course, most of you may know that the Fool Four and the RP4 did just fine. They were helped by dividends, and by the fact that finding four out-of-favor stocks from the Dow still provides excellent returns even if the Dow 30 overall is flat.

Regarding dividends, the important thing is that they provide returns even if there is no price, or capital, appreciation. As a result, the Dow 30 stocks with dividends reinvested returned an annualized 7.56% a year from 1966-1982, while dividend yields averaged 4.92% for the same period, providing almost two-thirds of the overall total return.

Both the Fool Four and the RP4 (Ratio Procedure 4) did a lot better over this seventeen-year period, returning 18.19% and 17.69%, respectively. Dividends account for more than one-third of this total -- 6.57% for the Foolish Four and 6.55% for the RP4. While dividends play a role, these strategies clearly produced quite a bit of price appreciation in a flat market. They were able to select four stocks annually out of a pool of thirty that grew more than twice as fast as the thirty-stock universe from which they were selected.

This kind of disparity between the Dow overall and these two variations of the Dow Approach, sustained over a seventeen-year flat market that included many of the most unpleasant post-War episodes in American political and economic history (Watergate, oil embargo, stagflation, and recession), is probably the strongest argument for the Dow Dividend Approach.

But before we pat ourselves on the back for being smart enough to use this strategy, we should remember the volatility involved -- these years included some drops and slow periods that should make all of us pause, spoiled as we are by these bull-market years. How many of us following the Foolish Four strategy could hold on if the approach declined for two years in a row, as it did in 1969 by 8.41% and in 1970 by 6.35%? Especially since many Wise people in the financial press would probably write about the demise of the Fool Four? When a similar two-year decline happens again, which it inevitably will, will our Dow Dividend message board be filled with flames from people furious at the Fool for leading them to such a horrible strategy? Who knows? Of course, over the three following years, 1971-73, the Fool Four returned over 20% annualized, but whether people held on until then is another question.

Such two-year periods are rare, fortunately, which is part of the point of these Dow Dividend thingies -- your downside risk should be less than the market overall. In fact, the '69-'70 decline is the only time that the Fool Four or the RP4 have suffered two consecutive negative years since 1961.

Either way, when the averages are done over a long-term period of seventeen years, even while the Dow hovers around 1,000, the Dow Approach turns out pretty well.

Current Dow Order | 1998 Dow Returns

10/22/98 Close

Stock Change Last -------------------- UK - 7/16 40.88 IP - 7/8 47.19 MO + 3/16 50.13 EK -1 15/16 74.56

Day Month Year FOOL-4 -1.29% 0.11% 10.96% DJIA +0.16% 8.80% 7.90% S&P 500 +0.80% 6.04% 11.13% NASDAQ +1.66% 0.52% 8.42% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 74.56 23.12% 12/31/97 276 Philip Mor 45.25 50.13 10.77% 12/31/97 289 Int'l Pape 43.13 47.19 9.42% 12/31/97 291 Union Carb 42.94 40.88 -4.80% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15359.88 $2884.00 12/31/97 276 Philip Mor 12489.00 13834.50 $1345.50 12/31/97 289 Int'l Pape 12463.13 13637.19 $1174.06 12/31/97 291 Union Carb 12494.81 11894.63 -$600.19 CASH $754.73 TOTAL $55480.92