Foolish Four Portfolio
By
Darryl, Meet Sammy
Baltimore, MD (Sept. 22, 1999) -- "Darryl Who?" was my wife's puzzled response to my inquiry.
Just about everyone in the free world has heard of Sammy Sosa and Mark McGwire, the dynamic duo on a frenzied drive to see who can hit the most balls out of major league baseball parks. But, I'd wager significantly fewer people have heard of Darryl Hamilton, and his record.
Darryl Hamilton plays center field for the New York Mets. He owns the record for fielding average by a major league outfielder. For the uninitiated, a fielding average is simply a measure of how frequently a fielder capably handles a ball hit to him, without making an error. Throughout an 11-year career that spans almost 1,200 games and over 9,000 innings, Darryl Hamilton has had a total of 2,635 total chances to field a ball hit to him. He made only 14 errors in all those games, for a fielding average of .995.
When a center fielder makes an error, it's often a disaster. A blooper can cost the team runs and even the game. But Darryl's fielding capabilities avert these disasters. His glove is a valuable asset for any winning team.
Which somehow brings me to our favorite topic around here, that of the Foolish Four (FF). Believe it or not, the players on Team FF, as represented by the stocks in the portfolio, are extraordinary fielders. They manage to avert disasters like comic strip superheroes. Team FF, sporting four players a year, has more than its share of Darryl Hamiltons.
Just ask Fool Chris Rugaber. About a year ago, he analyzed Dow disaster stocks, which he arbitrarily defined as stocks that lost more than 15% in value in a calendar year. Chris found that, from 1961 to 1997, 14.5% of the stocks in the Dow 30 had lost more than 15% in a single year. However, only 8.1% of Foolish Four stocks in the same period could be called "disasters."
Chris's data looked at our old Foolish Four strategy, previously known as the UV4. UV4 has since been supplanted by the RP4, which is the current version of our Foolish Four. (See "The Foolish Four Evolves" to help clarify the history.) I ran the numbers again, updating them to reflect the additional year since the article was written, as well as the new, improved FF.
It turns out that our current version of the Foolish Four is just as adept at averting disasters as the older strategy. Since 1961, according to the Dow Dividend Spreadsheet, there have been 1,140 Dow stocks available for purchase with a January start date. Of these 1,140 Dow stocks, 162 (14.2%) have lost more than 15% in the year. Of the Foolish Four stocks, RP version, only 12 of 152, or 7.9%, have been disasters.
We've shown that Team FF has great fielders; it's chock-full of the Darryl Hamiltons of the investing world. But the minor leagues are bulging with wannabes that are "great field, no hit" wonders. Does the Foolish Four simply play it safe by averting disasters, on its way to market-beating returns? Or does our team have its share of Sammy Sosas? Can we bang out those homers when we need to?
To see, let's look at what I'll call the Dow Grand Slam stocks. I've arbitrarily designated Grand Slam stocks as those that gain over 50% in any one year. These offensive gems would be the envy of any investor's portfolio. (By the way, I also ran the numbers using a 40% cutoff, and it didn't make much difference.)
Of the 1,140 stocks (38 years times 30 stocks each year), only 88 (or 7.7%) hit grand slams.
Similarly, there were 380 "Dogs of the Dow" stocks over the same time span (38 years times 10 stocks). Recall that these stocks simply represent the 10 highest-yielding stocks of the Dow 30. Of these 380 Dow High Yielders, 26 (6.8%) hit grand slams, a percentage slightly lower than that of the full Dow 30.
And what of our Team FF? Since only four stocks are chosen each year, there are 152 players possible since 1961 (38 times 4). Of these 152 Foolish Four stocks, 11.2% (17) hit grand slams, compared to only 7.7% for the full Dow 30. Va-Voom!
So, the Foolish Four stocks haven't just outperformed the market because of their tendency to avoid meltdowns; they've also had more than their share of high-fliers. Team FF has had a booming offense as well as a crackerjack defense. Darryl Hamilton, meet Sammy Sosa. A team like this, with its 38-year winning record, seems destined for the Hall of Fame.
[Editor's Note: Following are the returns of a "paper" Beating the S&P portfolio. The stocks were selected December 31, 1998, and "purchased" in equal dollar amounts to be "held" for one year. To see a list of stocks for portfolios starting now, see Today's Stock Lists. Note that the stock split change has not yet been incorporated into this format.]
Beating the S&Pyear-to-date returns (as of 09-21-99):
Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> +32.7%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> +2.7%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> -22.9%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -14.4%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -7.3%
Beating the S&P -1.8%
Standard & Poor's 500 Index +6.4%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +24.5%
S&P 500 +17.3%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $161,100
S&P 500 $75,700