<FOOLISH FOUR PORTFOLIO>

Top 10 Reasons
NOT to invest in the Foolish Four

by Ann Coleman
([email protected])

Reston, VA (December 21, 1998) -- You don't really want to invest in the Foolish Four, do you? There are a lot of reasons not to. They show up with clockwork regularity in my mail box. Some are legitimate, and some, in my opinion, are not. Here are the Top Ten reasons not to invest in the Foolish Four:

10. No matter what you invest in, it goes down. OK, you have our permission to avoid the Foolish Four. Shoo. Take your little rain cloud and go sit in someone else's portfolio. Just kidding. If you really think you can jinx the fortunes of a $30 billion company, you may need to spend some time in Logic Rehab, but irrational fear is not a good reason to avoid investing.

9. You want to invest monthly (quarterly). I hear this a lot. Between commissions and the January Effect, the Dow Strategies do not lend themselves to small periodic investments. It's very understandable that you want your money growing at the best possible rate as soon as possible. The problem is that most investments that work well for periodic deposits (Index funds are great for this) have a fairly high minimum. So you are back where you started. Still, if periodic investments are important to you, an index fund may be a better choice, at least for some of your money.

8. The whole market is wildly overpriced and is likely to come crashing down. Yeah, yeah, yeah. I have been hearing this for the past three years. Anyone who got out of the market because it was overvalued in 1996 lost out on one of the great bull markets of all time.

Still, the market is at very high levels according to almost all measures of valuation. A "correction" may very well be inevitable. Will it come next year? I don't know. The world is always fraught with dangers, and reasons for the market to crash abound every year. Even so, most of the time, the market goes up. If it will help you sleep better, put some of your money in bonds.

7. The stocks picked look like real losers. Well, duh! That's the idea. Buying any of the Dogs of the Dow is often a hold-your-nose-and-swallow kind of investing. Remember a few years ago when AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> looked like it was going to totter off in senility? Remember last year when Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> was about to be killed in a duel with Fujifilm? Remember when International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> was... well, about where it is now? The point is to buy the losers while they are still losers. Some Dow Dogs do go into death spirals, but not very often.

6. The strategies may not work anymore. This one I am not too worried about -- but it sure pops up in my mail with great regularity. We've looked into the idea that the very popularity of the Dow strategies will cause them to fail. We found no evidence so far. In my opinion, the small investor who can zig when the institutional investors zag will continue to have an advantage.

5. It didn't beat the S&P last year and may not beat it this year. This is very true. And it concerns me a bit. Looking over the annual returns in our Spreadsheet there have been many times when the RP variation was beaten out by another strategy for two years in a row, but none where the Standard & Poor's 500 Index beat it twice in a row. So this is the first time. Is that significant? There is no way to tell if this is the start of a trend or simply an anomaly.

Given that the S&P has been performing extraordinarily well the last four years (it's the best four-year stretch for the S&P in history -- history meaning all the way back to 1926, which is as far back as my records go), it's not surprising that a mechanical strategy designed to beat the Dow is not keeping up.

Normally, the annual returns for the Dow and S&P are fairly close, and over 10-year periods, they are virtually identical. Occasionally, one or the other pulls ahead for a year or two. Last year's 10 point gap is not unprecedented. If the gap between the Dow and the S&P returns to its historical less-than-1% average level, then the strategies that beat the Dow should once again be beating the S&P.

4. You can pick better stocks on your own. Great. Go for it! I must note here that one of the best stock pickers of recent times, our own David Gardner, keeps a pack of Foolish Four stocks in his astounding Rule Breaker portfolio as "ballast."

3. You can get higher returns following the Rule Breaker or Rule Maker portfolios. Another good reason not to put all of your money in the Foolish Four. Just be sure you are comfortable with the higher risk.

2. IP. 'Nuff said.

1. It has a dumb name. Can't see yourself pontificating to your colleagues at the office Christmas party about how you made a killing in the market following "The Foolish Four?" Maybe this Bud's not for you.

Have I scared you off yet? Of course that's not the purpose of this exercise. The idea is to help you examine your motivations for investing AND your fears. If you are feeling a bit confused now, that's good. It shows you've been paying attention.

Tomorrow we will look at some alternatives that might be better choices for some or all of your money if one of the reasons above hits home.

By the way, it may come as a surprise, but I am not a cheerleader for the Foolish Four. It's neither my job nor the Motley Fool's mission to convince you that you should invest in this strategy. We would like to convince you that you should be informed about your investing decisions, know what your investments are earning, and not be afraid to invest in stocks. We also want to provide you with some information that may make investing in stocks easier and more profitable for you. That's where the Foolish Four comes in. Really.

Fool on and prosper!

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Today's Stock Lists | 1998 Dow Returns

12/21/98 Close

Stock Change Last -------------------- UK --- 40.63 IP +1 3/16 42.94 MO + 6/53 52.31 EK - 5/16 74.00

Day Month Year FOOL-4 +0.57% -3.62% 10.01% DJIA +0.96% -1.40% 13.66% S&P 500 +1.25% 3.37% 23.95% NASDAQ +2.49% 9.67% 36.15% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 74.00 22.19% 12/31/97 276 Philip Mor 45.25 52.31 15.61% 12/31/97 289 Int'l Pape 43.13 42.94 -0.43% 12/31/97 291 Union Carb 42.94 40.63 -5.39% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15244.00 $2768.13 12/31/97 276 Philip Mor 12489.00 14438.25 $1949.25 12/31/97 289 Int'l Pape 12463.13 12408.94 -$54.19 12/31/97 291 Union Carb 12494.81 11821.88 -$672.94 Dividends Paid YTD $1092.81 TOTAL $55005.87 </FOOLISH FOUR PORTFOLIO>