<FOOLISH FOUR PORTFOLIO>

Angst and Indecision
While the markets reel

by Ann Coleman (TMF [email protected])

Reston, VA (February 10, 1999) -- We have raised a specter, and I expect it will be floating around for a while. It is the specter of the Foolish Four (all of the yield-based Dow strategies, actually) not "working" anymore.

With two years back-to-back where these strategies have underperformed the Standard & Poor's 500 Index and, to a lesser degree, the Dow, this is a question that we need to consider. Many mechanical strategies fail once they become commonly known or widely followed. That could be what is happening here, but as far as I am concerned, the jury will be out for a while yet.

My opinion is that what we are seeing is not so much a failure of the strategy as the success of high tech and Internet stocks, which are in short supply on the Dow. Usually, when the market swings to an extreme in one direction, it has a tendency to reverse itself until equilibrium is restored. I'm not making a prediction here, by the way -- just an observation.

I had two interesting pieces of mail on this subject that I want to share with you. The first asked the obvious question, "What benchmark will you use to decide the Foolish Four no longer works?"

I've been asking myself that question since Monday, but I haven't come up with an answer yet. A ten-year average that underperformed (it would be the first time that that has happened) would definitely convince me that something was amiss, but less than that... I just don't know. If we don't beat the market this year, I will definitely be thinking a lot about this, and I welcome input from all of you. I can promise you that we will face this question squarely.

On a more positive note, Rich Kargher wrote:

To be honest, even if the Foolish Four should no longer be, for whatever the reasons, the market-beating strategy it has been these past few decades, I still think:

(1) The strategy is sound;

(2) You are buying into huge and generally well managed companies, which, at the very least, helps maintain the value of the portfolio;

But most importantly

(3) It is possibly the best way to get a "green-horn" investor to graduate from mutual funds and into the stock market!

The Foolish Four, in all its mechanical glory, will always remain a useful, and profitable (if not tremendously so), portfolio strategy from which to learn and with which to teach. All that buying and selling and choosing brokers, and all the other experiences in managing a portfolio, bring with it the wonderful lessons one needs in becoming a competent, and confident, investor.

So the Wise cast doubts and derision to scare us individual investors. So what?! Let them keep their derivatives and hedge funds and other interesting financial "products" that generally don't do better -- and more than a few times have done far worse.

Finally, so what if "F4" wins some and loses some?! So what if it no longer "works" and can't do better long-term than the historical market average of 10% or so (as if it is likely for a portfolio of several huge cash-rich companies to do worse)?! So what?! I've gotten an education from it that's priceless. It's what's made me the Fool I am today! And I can always transcend it as my learning grows and confidence builds.

Thanks, Rich. I couldn't have put it as well myself. Of course, not everyone will share your views, and certainly I will feel some responsibility for raising expectations and failing to meet them. When it comes right down to it, we are all in this together, learning together and investing together. That's my money down there, and I certainly hope it does better than the market over the next five years. If fact, I still expect it to trash the market indices. But I've been wrong before.

Tomorrow: Chris Rugaber looks at the Dow vs. the S&P.

Friday: The Un-Dow.

Fool on and prosper!

Today's Stock Lists | 1998 Dow Returns

02/10/99 Close

Stock Change Last -------------------- CAT -1 3/8 45.69 JPM +3 5/16 103.81 MMM + 1/8 75.38 IP - 1/4 42.19

Day Month Year History FOOL-4 -0.17% 1.71% -0.42% 1.06% DJIA +0.48% -1.94% 0.10% -0.29% S&P 500 +0.61% -4.38% -0.14% 0.10% NASDAQ -0.06% -7.84% 5.33% 6.77% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 45.69 6.05% 12/24/98 14 3M 73.57 75.38 2.45% 12/24/98 9 JP Morgan 105.51 103.81 -1.61% 12/24/98 22 Int'l Paper 43.55 42.19 -3.13% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1096.50 $62.50 12/24/98 14 3M 1030.00 1055.25 $25.25 12/24/98 9 JP Morgan 949.62 934.31 -$15.31 12/24/98 22 Int'l Paper 958.12 928.13 -$30.00 Cash $28.26 TOTAL $4042.45 </FOOLISH FOUR PORTFOLIO>