<FOOLISH FOUR PORTFOLIO>

What to Expect
From the Foolish Four

by Ann Coleman
(TMF [email protected])

Reston, VA (March 23, 1999) -- Developing a set of realistic expectations is a good first step in setting investment goals. After all, you can have a goal of doubling your money every year, but if you are invested in utility stocks, you are rather unlikely to reach that goal.

One of the comforting things about the Foolish Four is that we have a 38-year history of the strategy that shows us exactly what would have happened to an investor had she or he been following the strategy at any time since 1961. Naturally, there are no guarantees that the strategy will continue to do as well in the future as it has in the past. But I think it is a reasonable guide to what one might expect in general.

The first thing that struck me as I was compiling this data from our Dow Dividend Strategy Spreadsheet was that an awful lot of stocks stick around for two or more years. When you look at the history, you will see that each year, between two and three stocks hang around for another year. In fact, in 1995 and 1996, the stock lists are identical, although the order changed (the stocks are listed by their RP).

What does this mean? Probably that it takes longer than a year for many stocks to recover fully. Keep in mind that we are buying out-of-favor stocks and they don't necessarily get back to a fully valued price within one year. Often that second year is a terrific one.

The next thing I noticed was that there are quite a few stocks that don't do very well. Not every stock picked by the RP process is a winner. (If you know of an infallible stock picking strategy, please send it to me right away. And then don't tell anyone else!)

Take a look at 1991. The same process that picked Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> and AlliedSignal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>, both up over 50%, also picked General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, down almost 5%. Sure, I'd like to improve on that, but until we find a better way, let's celebrate the winners and consider the not-so-hot picks as just part of the cost of doing business.

The whole point of using a mechanical stock picking system is not to pick all winners, which is impossible, but to pick enough outstanding stocks that the average return beats the market -- or beats the stocks you would pick yourself.

What else can we learn from the Foolish Four History? Well, there has been a fair amount of concern because it hasn't beaten the market for the last two years. But our history shows it also lost to the Standard & Poor's 500 Index in 1979 and 1980 and went on to do rather well after that. And it was crushed by the market in 1966, and again in 1990, yet survived.

It's also fairly obvious that the returns vary widely. In fact, there are only 6 years, out of 38, where the return was even within 4 percentage points of 24%! The returns for the individual stocks vary even more wildly.

Again -- I can't seem to say this often enough -- it's the long-term average that counts. That is both comforting and scary. Scary because there are no guarantees in stock investing, and if the strategy has really lost its magic, we won't know for 5 or 10 years, but comforting because all the ups and downs have happened before and still the strategy has managed to pull down an average of 20% per year over the last 38 years and 24% per year over the last 25 years.

Fool on and prosper!

Today's Stock Lists | 1998 Dow Returns

03/23/99 Close
Stock  Change   Last
--------------------
CAT  -1 13/16  45.13
JPM  -3  9/16  122.88
MMM  -  13/16  71.63
IP   -1  1/4   45.25




                   Day   Month    Year   History
        FOOL-4   -2.63%   3.17%   4.21%   5.76%
        DJIA     -2.21%   3.92%   5.73%   5.31%
        S&P 500  -2.69%   1.92%   3.00%   3.24%
        NASDAQ   -3.05%   1.52%   5.94%   7.39%

    Rec'd   #  Security     In At       Now    Change

 12/24/98    9 JP Morgan    105.51    122.88    16.46%
 12/24/98   24 Caterpillar   43.08     45.13     4.75%
 12/24/98   22 Int'l Paper   43.55     45.25     3.90%
 12/24/98   14 3M            73.57     71.63    -2.64%


    Rec'd   #  Security     In At     Value    Change

 12/24/98    9 JP Morgan    949.62   1105.88   $156.26
 12/24/98   24 Caterpillar 1034.00   1083.00    $49.00
 12/24/98   22 Int'l Paper  958.12    995.50    $37.38
 12/24/98   14 3M          1030.00   1002.75   -$27.25

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4230.43

</FOOLISH FOUR PORTFOLIO>