<FOOLISH FOUR PORTFOLIO>

Money Mag Rags
on the Foolish Four

by Ann Coleman (TMF [email protected])

ALEXANDRIA, VA (July 15, 1999) -- We interrupt our regularly scheduled discussion of Retirement Planning (see the archives starting June 28th if you haven't caught up on the series yet) to make a few comments on Money and the article published in their August edition that is critical of the Foolish Four.

The cover headline is "Jason Zweig Rips the Motley Fool." Mr. Zweig seems to be rehashing the recent "Mining Fool's Gold" articles that were published in the March/April edition of the Financial Analysts Journal. We've already gone over that criticism in great depth. You can find that series running May 10 through 21 in the archives.

In a nutshell, the Money article says that the Foolish Four's stock selection criteria don't make sense and therefore one cannot count on the past returns continuing into the future.

Here's the relevant paragraph from the article. It follows a description of the RP formula:

No, I'm not making this up -- and yes, you're right to be confused. As financial planner Bill Bernstein has pointed out, there's no way these cockamamie contortions add up to a rational hypothesis. Why on earth should the square root of a stock's current price (dividend into its yield or anything else) affect its future return? Why would anyone in his right mind drop the stock that scores highest for a desirable quality but keep those that score second through fifth?

Sigh.

The article reminds me a bit folks who criticize the theory of evolution because it is "ridiculous" to think that man evolved from monkeys. It's easy to criticize something you don't understand and haven't closely examined. (Please, if you're tempted to start a theological discussion with me on the merits of the Theory of Evolution, I must decline the invitation. I'm sure I will busy enough with the financial and statistical discussion!)

Since these two points are covered in depth in the Fool's Gold? series, I would simply refer anyone who is concerned about this to those articles. There is one point that I didn't make in that series that seems relevant now. In his "False Profits" article, Mr. Zweig lumps the Foolish Four in with day trading and other highly risky "investment" schemes.

I guess that is meant to imply guilt by association, but at the very, very least, with our strategy you are buying high-yielding Dow companies -- some of the most respected and sound corporate organizations in the world. If the strategy stops working tomorrow, you will be left high and dry holding not an empty bag, but ownership in those companies. That is not a terrifying prospect.

To me the most revealing paragraph in the whole article is this:

When 90% of professional investors with their M.B.A.s and powerful computers and multimillion-dollar research budgets can't beat the market, why should you believe anyone who says you can do it...

Why indeed? Other than the results, of course.

For a good discussion of this article and the whole topic of Data Mining, visit the Dow Investing/Foolish Four message board.

There are no guarantees. One of the very real concerns that we have voiced repeatedly in this space is the possibility that if the strategy were to become too popular, its effectiveness would diminish. Thanks to folks like Mr. Zweig, I feel much better about that particular risk, now.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

07/15/99 Close
Stock  Change   Last
--------------------
CAT  -   5/16  59.50
JPM  -   3/16  138.19
MMM  -   3/16  87.81
IP   -2  5/16  51.75



                  Day    Month   Year   History
        FOOL-4   -1.21%   0.24%  26.07%  27.95%
        DJIA     +0.34%   1.97%  22.62%  22.14%
        S&P 500  +0.82%   2.69%  15.25%  15.53%
        NASDAQ   +0.76%   5.72%  29.49%  31.27%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     59.50    38.12%
 12/24/98    9 JP Morgan    105.51    138.19    30.97%
 12/24/98   14 3M            73.57     87.81    19.36%
 12/24/98   22 Int'l Paper   43.55     51.75    18.83%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1428.00   $394.00
 12/24/98    9 JP Morgan    949.62   1243.69   $294.07
 12/24/98   14 3M          1030.00   1229.38   $199.38
 12/24/98   22 Int'l Paper  958.12   1138.50   $180.38

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5117.81