Foolish Four Portfolio
By
Fooling in Real Time
What's reality got to do with it?
RESTON, VA (September 20, 1999) -- I'm about to conclude that watching the Foolish Four in "real time" can be hazardous to your investment's health. If the daily, weekly, and monthly swings in the value of each stock aren't enough to throw some folks into a panic, the daily changes in the Foolish Four list seem to push them over the edge.
Relax. Go fishing. Take a cruise. Wait -- that's not exactly what I mean. I'm forgetting the self-interest angle. I guess it's a bit contradictory to be writing a daily column about the strategy, reporting on the daily price movements, expecting people to check in here for updates, and then tell them not to look. But you need to know how to look at those numbers below and that list over there on the right. (Actually, you probably don't want to look at today's numbers.)
Let's start with the returns. First, get rid of the idea that stocks go up in linear fashion. The idea that the Foolish Four strategy has you buying the stocks in December, at or near their lows, then selling them a year later, at or near their highs, is simply not true.
Stocks run up and fall back, drop right after you buy them, and surge right after you sell them. All of those things can and will happen while you are holding the Foolish Four stocks. If you are going to watch it happen in real time, you have to work very hard at getting rid of the idea that you have to buy at the low and sell at the high to make money. You don't. And trying to is more likely to result in lower returns, in the long run, than just following the strategy. That's why you got interested in a mechanical strategy, remember?
You don't have to sell near the top. You don't have to make money on every stock you hold (a totally unrealistic expectation). You don't even have to beat the market in every year.
All that counts is the long-term average. What individual stocks do in the meantime is immaterial. Ideally, you should be beating the market most of the time, or your average return won't beat it by much. But worrying about one stock out of four that looks sickly or a whole portfolio that is down after two months is a waste of good worrying time.
Now, normally, investors should expect to make money on every stock they buy. It would be dumb to buy stocks otherwise. But they also need to hold, along with that expectation, the realization that it won't always work that way.
With a mechanical system like the Foolish Four, you can merge those expectations. It makes perfect sense to me to buy the Foolish Four expecting that not all of the stocks will beat the market, that you may lose money on some, and that some will run up and fall back while others will take a dive the minute your trade settles. But until your crystal ball gets all the kinks out, I wouldn't try to say which stocks will do which of those things.
And that's OK. That's the way it has always worked. Those 38 years of great returns that we are always quoting are just a series of snapshots. Had you watched the stocks in real time, you would have seen exactly what we are seeing now.
In the same way, the stocks that are "on the list" have always shifted around. When the price changes, the yield (yield = dividend/price) will naturally change, and the list of stocks will shift accordingly. All you can do is take aim at those moving targets and, quite literally, hope for the best.
That doesn't sound very "financial," does it? But it's real.
Thanks to an enormous number of people who wrote in over the weekend in response to my Friday Rant, I want to share some websites that fight e-mail hoaxes, virus hoaxes, and urban legends in general. (You mean there never was a girl whose beehive hairdo was left up so long that roaches nested in it and ate her brain!?!) The sites are quite entertaining, and the folks who maintain these and other websites are striking a blow for rationality. Bravo.
Anti-hoax websites:
http://www.snopes.com/
http://www.scambusters.com/
http://www.urbanlegends.com/
http://korova.com/virus/hoax.htm (not just for viruses)
While we're at it, sites for computer virus hoaxes:
http://vil.mcafee.com/hoax.asp
http://ciac.llnl.gov/ciac/CIACHoaxes.html
http://www.sarc.com
http://kumite.com/myths/ -- good stuff and links to other hoax sites.
Next time you're tempted to believe, check it out!
Fool on and prosper!