<THE FOOLISH FOUR>

The Old Foolish Four
by Ann Coleman
(TMF AnnC)

Reston, VA. (October 26, 1998) -- Survey update: Still reading. Still counting. Thanks to everyone who responded. (Memo to self: Next time you get a bright idea like this, talk to Fool Techie Squad -- those marvelous guys developed an automatic polling program over a year ago!)

One thing I noticed from the letters I've received is that there is still a lot of confusion about just what the Foolish Four strategy is. When first proposed in The Motley Fool Investment Guide, the Foolish Four strategy called for always dropping the lowest priced stock and doubling the amount invested in the second-lowest priced stock, which was known as the "PPP," or Penultimate Profit Prospect. (Hey, don't blame us, it's Michael O'Higgins's term.) The Foolish Four innovation came directly from the Motley Fool's new (at the time) message boards, where O'Higgins' book Beating The Dow was a hot topic of conversation. The strategy was originally known as "2,2,3,4,5." Catchy.

Now known as the Old or Original Foolish Four (OFF in our acronyms dictionary), this variation soundly outperformed the Beating the Dow 5 (BTD5) strategy that O'Higgins had proposed. (Getting confused already? Take notes -- the acronyms just keep coming.)

Using 1971 as the starting date (as O'Higgins did in the BTD book), the compound annual return for the BTD5 through 1997 (January renewal) is 19.40%. The BTD4 (which drops the lowest priced stock but doesn't double up on the PPP) returned 21.70% and the Old Foolish Four (which both drops the lowest priced stock and doubles up on the PPP) returned 22.95%. The five-year rolling returns show a similar pattern. Dropping that lowest priced stock was a GOOD idea.

But we had never been entirely comfortable with the idea of doubling up on the PPP -- it's fine when the stock has a good year, but every so often the strategy is going to pick a loser in that spot, and when it does, watch out! In 1994, the PPP lost 38%. Gulp. Of course, in 1991, the PPP [Goodyear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>] was up 182%. Still, if someone doesn't really, really understand the idea of volatility and risk, a year like 1994 could scare him or her out of investing. That wasn't seen as a good thing for a strategy aimed at beginning investors.

So when Robert Sheard discovered that you could get almost the same returns without the double weighting simply by being somewhat more discriminating about when you dropped that lowest priced stock, we switched to his method. Originally known as -- never mind, you don't want to know! -- today's Foolish Four only drops the lowest priced stock when it is also the highest yielder. (The rationale here is that the low price isn't a danger signal until it gets really out of line with the yield.)

This switch was announced in the Gardners' second book, You Have More Than You Think, published last December. For the online announcement, click here: Fool 4 Changes Explained.

I need to make it very clear that the change was not because the Old Foolish Four was "bad." In fact, it has outperformed the new Foolish Four for the last three years (for portfolios chosen on January 2). The reason for the switch is simply to make the Foolish Four more newbie-friendly.

So what if you aren't a newbie? Hey, we've got strategies for you, too! Our Dow Dividend Approach/Foolish Four message board is just full of variations and improvements, one of which, the RP, we follow in this area. The important thing to know, however, is that you don't need them to beat the market. If you are willing to take on some additional risk, however, we have strategies that have beaten the Foolish Four and even the RP. Wednesday we will look into some of them.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

10/26/98 Close
Stock  Change   Last 
 -------------------- 
 UK   -   5/8   39.19 
 IP   +   3/16  45.75 
 MO   +   1/4   50.25 
 EK   -   3/8   73.13 
 
 
                    Day   Month    Year 
         FOOL-4   -0.25%  -1.99%   8.63% 
         DJIA     -0.24%   7.52%   6.63% 
         S&P 500  +0.16%   5.44%  10.50% 
         NASDAQ   +1.84%   1.84%   9.85% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     73.13    20.74% 
  12/31/97  276 Philip Mor    45.25     50.25    11.05% 
  12/31/97  289 Int'l Pape    43.13     45.75     6.09% 
  12/31/97  291 Union Carb    42.94     39.19    -8.73% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  15063.75  $2587.88 
  12/31/97  276 Philip Mor 12489.00  13869.00  $1380.00 
  12/31/97  289 Int'l Pape 12463.13  13221.75   $758.63 
  12/31/97  291 Union Carb 12494.81  11403.56 -$1091.25 
  
  
                              CASH    $754.73 
                             TOTAL  $54312.79