<FOOLISH FOUR PORTFOLIO>

Picking the New Foolish Four
A plea for help.

by Chris Rugaber
([email protected])

Alexandria, VA (November 19, 1998)-- As long-time readers of this space may remember, the selection process at the end of last year for the Foolish Four stocks in our model portfolio was fraught with controversy. Well, perhaps that's a bit much, but there certainly was confusion and some recrimination. This year, understandably, we're considering changing the process.

There were two aspects to last year's brouhaha. First, after posting the Foolish Four stocks at the market close on December 31, 1997, the stocks selected jumped significantly in price in after-hours trading, and by January 2, 1998, which was the first opportunity most people had to buy those stocks, they were a couple of bucks more expensive. As a result, our readers were unable to purchase the Foolish Four stocks at the same price we listed for our virtual portfolio and were therefore unable to get the same returns. In fact, the price changes also resulted in some of the December 31 Foolish Four stocks being replaced on January 2nd by other, lower-priced stocks. This also caused confusion.

The second cause of the contretemps was that Union Carbide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> and DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> had virtually identical dividend yields. Carried out to three decimal places, DuPont's yield was higher than Union Carbide's, and so on December 31, 1997 DuPont was listed as one of the Fool Four stocks. By January 2, 1998, however, it was realized that for a variety of reasons, we should calculate dividend yields only to the second decimal place (that's how most newspapers do it, for example). As a result, Union Carbide and DuPont should have been considered tied for the 10th highest-yielding spot in our Dogs of the Dow list, and since ties are broken by giving the spot to the lower-priced stock, Union Carbide's lower share price should have placed it in the Dogs of the Dow 10, rather than DuPont.

When this change was made to the Dogs of the Dow 10, and those 10 stocks were re-ordered by price, Union Carbide's share price was also low enough for it to be included in the Foolish Four. (For a more in-depth review of how stocks can easily fluctuate in and out of the Dogs of the Dow 10, check Ann Coleman's recent article on the subject). As a result, after DuPont was initially mistakenly posted as one of the Fool Four stocks on December 31, 1997, it was replaced with Union Carbide. Since this is just a model portfolio, none of this involved real trading, so that's why you now see 12/31/97 as the entry date for Union Carbide. For the whole gory story, check the article from January 2, 1998 in our archives.

All this, as previously mentioned, caused a bit of fuss. But it's worth noting how little the DuPont/Union Carbide issue has mattered to the returns of the Fool Four. As of Monday's close, for example, the two stocks' returns were within 1% of each other.

This is not to minimize the confusion that was created, nor is this an attempt to "spin" a basic mistake on our part into a more positive light. (It would be much easier to leave this episode buried in our archives!) Instead, this year we want to reconsider our approach, and we'd like to hear your feedback.

We are primarily concerned with timing. Should we make the switch on December 31st again, since that's a common beginning point, or January 2nd, which may be a more convenient date? Our goal is to make the switch fairly, so that our readers can follow along as much as possible. (We'll address tax considerations later; for now, assume that our virtual Foolish Four portfolio is in an IRA account, and therefore we don't have to worry about holding for a year and a day).

Of course, keep in mind that the switch will never work perfectly. Once we post the Foolish Four, some degree of after-hours trading will occur, and prices for the stocks may be different the next day. Stocks normally float in and out of the Foolish Four throughout the year, and there's no reason to believe it won't happen in the middle of a switch.

Please feel free to discuss this issue on our message boards, or e-mail me at TMF [email protected]. We'll periodically discuss the feedback and, of course, let you know how it turns out. Thanks in advance for your thoughts!

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Current Dow Order | 1998 Dow Returns

11/19/98 Close
Stock  Change   Last
--------------------
UK   -   7/16  43.75
IP   -   1/2   45.25
MO   +   5/8   55.31
EK   +   1/8   76.19

                   Day   Month    Year
        FOOL-4   -0.13%   4.34%  15.72%
        DJIA     +0.17%   5.40%  14.51%
        S&P 500  +0.71%   4.91%  18.77%
        NASDAQ   +1.17%   8.37%  22.24%

    Rec'd   #  Security     In At       Now    Change

 12/31/97  206 Eastman Ko    60.56     76.19    25.80%
 12/31/97  276 Philip Mor    45.25     55.31    22.24%
 12/31/97  289 Int'l Pape    43.13     45.25     4.93%
 12/31/97  291 Union Carb    42.94     43.75     1.89%


    Rec'd   #  Security     In At     Value    Change

 12/31/97  206 Eastman Ko 12475.88  15694.63  $3218.75
 12/31/97  276 Philip Mor 12489.00  15266.25  $2777.25
 12/31/97  289 Int'l Pape 12463.13  13077.25   $614.13
 12/31/97  291 Union Carb 12494.81  12731.25   $236.44


               Dividends Paid YTD  $1092.81
                            TOTAL  $57862.19

</FOOLISH FOUR PORTFOLIO>