<FOOLISH FOUR PORTFOLIO>
Told You So!
The sky is falling -- we shoulda sold!!!
by Ann Coleman (TMF [email protected])
Alexandria, VA (May 28, 1999) -- OK, who's been saying "I told you so"? That's not very nice, you know. Three to four weeks ago, the most popular topic of discussion around here was "Should I sell now and lock in these great gains?"
No sooner did we assure you that this was a bad idea than inflation reared its ugly head and drove the Dow, and the Foolish Four, back down. Not all the way back, but down from the lofty heights of early May. No one has yet actually written to me to say "I told you so" (proving once again that we have the most civilized and rational readers online), but it's not hard to imagine what some of you might be thinking.
So let's review, one more time, why I still think it is a bad idea to sell when you think a stock has reached its peak. Better qualify that -- why it's a bad idea to sell a Foolish Four stock when you think it's reached its peak.
If you are a Foolish Four investor, presumably you are one because you want a low-maintenance mechanical investing strategy. For some reason, this idea seems to generate a lot of conflict in some folks who just can't stand it -- they have to improve the system! I know, I had the same feeling about Beating the Dow. I have utmost sympathy for attempts to improve on the strategy.
BUT, if you want to improve on a mechanical strategy, you need to play within the rules, which means developing a systematic approach and testing it. Selling because a stock is up 30% is the kind of emotional "fear and greed" investing that mechanical strategies are supposed to protect you from.
There is no question that some people have a knack (usually acquired after long study) for getting in and out of stocks at the right time. I don't have that knack. Frankly, I assume most people don't until I see a full trading history -- as opposed to the trades that they prefer to talk about. Backyard barbecue discussion notwithstanding, most (not all) people who try to trade this way make far more bad calls than good ones. Over time, the results are usually disappointing.
Once you make the commitment to a mechanical strategy, it only makes sense to stick with it at least until it is clear that the strategy is no longer working or something demonstrably better comes along. Starting a mechanical strategy and then trying to fine-tune it as you go along, with nothing to go on other than the baying of those hounds of Wall Street, Fear and Greed, is a recipe for disaster. If not this time, then next time.
We do have plans to see if there is any possibility of developing a rule of thumb (such as sell when a stock is up 30%) for buying a selling Foolish Four stocks. My expectation is that either there will be no sweet spot or that the overall gains from such a strategy won't be much greater than the buy-in-December-hold-for-a-year strategy that we've seen work so well. Even looking into such a question raises big question in my mind about whether we can construct a study that won't be simple data mining. It will be a challenge.
Until we have a chance to dig through the numbers and digest what we find, there are no ad hoc rules.
Fool on and prosper!
Today's Stock Lists | 1999 Dow Returns
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| 1999 Dow Returns
05/28/99
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Stock Change Last
--------------------
CAT - 1/2 54.88
JPM +4 3/16 139.31
MMM - 1/4 85.75
IP -2 11/16 50.00
Day Month Year History
FOOL-4 -0.74% -5.83% 21.42% 23.23%
DJIA +0.89% -2.13% 15.40% 14.94%
S&P 500 +1.59% -2.50% 6.23% 6.48%
NASDAQ +2.12% -2.84% 12.67% 14.22%
Rec'd # Security In At Now Change
12/24/98 9 JP Morgan 105.51 139.31 32.04%
12/24/98 24 Caterpillar 43.08 54.88 27.38%
12/24/98 14 3M 73.57 85.75 16.56%
12/24/98 22 Int'l Paper 43.55 50.00 14.81%
Rec'd # Security In At Value Change
12/24/98 9 JP Morgan 949.62 1253.81 $304.19
12/24/98 24 Caterpillar 1034.00 1317.00 $283.00
12/24/98 14 3M 1030.00 1200.50 $170.50
12/24/98 22 Int'l Paper 958.12 1100.00 $141.88
Dividends Received $29.45
Cash $28.26
TOTAL $4929.02