<FOOLISH FOUR PORTFOLIO>

Testing, Testing
How do you score economically?

by Ethan Haskel ([email protected])

[Editor's note: Ethan Haskel is away on vacation this week, which is a good excuse to recycle one of our favorite essays from his days in the Foolish Workshop.]

BALTIMORE, MD (July 28, 1999) -- Pop Quiz.

1. The stock market is an example of an institution within our economy that exists to help people achieve their economic goals. The existence of this institution:

A. Results in an increase in the price of stocks.
B. Brings people who want to buy stocks together with those who want to sell stocks.
C. Helps predict stock earnings.

2. If the price of beef doubled and the price of poultry stayed the same, people would most likely buy:

A. More poultry and less beef.
B. Less poultry and more beef.
C. The same amount of poultry and beef.

A recent Harris poll found that only 52% of American adults knew the correct answer to the first question was B. Even fewer high school students, 38%, got it right. Only 58% of adults knew the correct answer to the second question was A.

The poll, consisting of 20 questions on basic economics topics like these, documents America's economic ignorance. Only 31% of adults received a score of C or better. Forty-nine percent of adults and 66% of high school students flunked outright.

What does all this have to do with our Workshop corner of Fooldom? More than you might expect. Here are just a few examples:

1. The same citizens who take these polls elect our country's politicians, the representatives who write the laws that determine our nation's economic health. How can we even begin to tackle complex financial issues like the national debt when many of us don't understand the principle of supply and demand? A healthy national economy is a prerequisite for healthy corporations and, thus, healthy stock prices.

2. Given our economic illiteracy, it shouldn't be surprising to hear that thousands of us are fleeced daily by financial schemes, hypesters, and others who prey on our ignorance. How can one discern the truly worthy Workshop screens from those doomed to failure, or worse, those ruses promulgated by the Wade Cooks of the world? Too many of us are poorly equipped to fight back.

3. Often the Workshop screens can develop a life of their own. We get caught up in jargon terms like dividend yield, relative strength, PEG, or RP ratio. A certain detachment can develop if we forget that the real reason stock prices increase (or decrease) usually has little to do with these indicators. Rather, they depend on basic financial principles like inflation or productivity. Understanding what makes economies run keeps us tethered to reality.

Ahh, it feels better getting that off my chest! Time to come off the soapbox now. If you'd like to take the full economics test to see how you or your children rate, or learn more about how to better teach our students these vital topics, check out the website sponsored by the National Council on Economic Education.

[Another note: Ethan's report on the BSP portfolio will return August 4. To see the most recent numbers, click here: Superhuman Feats.]

Today's Stock Lists | 1999 Dow Returns

07/28/99 Close

Stock Change Last -------------------- CAT +1 1/8 61.25 JPM -1 1/2 134.00 MMM + 1/4 89.13 IP - 3/8 53.25

Day Month Year History FOOL-4 +0.17% 1.33% 27.44% 29.34% DJIA -0.06% 0.01% 20.29% 19.81% S&P 500 +0.19% -0.54% 11.66% 11.93% NASDAQ +0.99% 0.75% 23.40% 25.09% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 61.25 42.18% 12/24/98 9 JP Morgan 105.51 134.00 27.00% 12/24/98 22 Int'l Paper 43.55 53.25 22.27% 12/24/98 14 3M 73.57 89.13 21.14% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1470.00 $436.00 12/24/98 9 JP Morgan 949.62 1206.00 $256.38 12/24/98 14 3M 1030.00 1247.75 $217.75 12/24/98 22 Int'l Paper 958.12 1171.50 $213.38 Dividends Received $49.99 Cash $28.26 TOTAL $5173.50