Foolish Four Portfolio
Crystal Ball Gazing
A glimpse into the future

By Ann Coleman (TMF AnnC)

RESTON, VA (Sept. 27, 1999) -- No, I can't tell you anything about your love life, and I don't moonlight on the Psychic Friends Network (shudder), but if you are a Foolish Four investor, I can tell you your investing future.

  1. You will never buy the four best stocks on the Dow.

  2. You will rarely, if ever, hold even two of the four best-performing stocks on the Dow.

  3. Almost every year, at least one of the four stocks in your Foolish Four portfolio will underperform the market, sometimes by a large margin.

  4. On average, your Foolish Four portfolio will fail to beat the market in one out of every four years.
There you have it, and you didn't even have to cross my palm with silver.

I can hear it now: "Isn't she being rather negative?"

Yep. It's because I've grown to suspect that too many people hear the "24% per year for the past 25 years" part and tune out the rest. Right now, with the portfolio slipping down (along with the entire market), it is really important to keep in mind that those great returns over the past 25 years occurred right along with all of the bummers above.

I found them by performing a fun little exercise with our Dow Dividend Spreadsheet. I set it up to sort the Dow stocks by their total return for each year and then noted where on that list the Foolish Four stocks (selected at the beginning of the year) happened to land.

To the casual observer, the results would not have been impressive. The Foolish Four stocks looked like they were mostly in the middle of the list. Only by averaging the returns of the Foolish Four stocks and comparing them to the average of all Dow stocks can one see that "mostly in the middle" beat the average for all stocks by a very comfortable margin.

You see, those "mostly in the middle" stocks were, mostly, a little bit above the middle. They occasionally showed up near the very bottom of the stack, and slightly more often one or two were close to the top. But mostly they were in the middle. However, simply by being slightly skewed toward the upper side of the list, over the long term, they beat the market in 28 out of the last 38 years -- about three years out of four.

And, well, yes, I have to admit that the Foolish Four didn't just beat the market, it pretty much destroyed it. (Beating the market by an average of eight percentage points per year should fit most investors' definition of "destroyed.") And that's the problem. Despite the long-term glamour, the day-to-day reality isn't very exciting. In fact, it's mostly average-looking.

Right now, it's rather grim-looking for folks that started the strategy a few months ago and bought Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> or Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %>. Both are way, way down in the last few weeks. Both are still very strong companies with excellent turnaround prospects. We talked about Sears on Friday. Most of that column applies to Goodyear as well. You can check out the Goodyear financial picture in our Snapshot or with the SEC's latest quarterly filing. I don't think you will find anything alarming other than the recent earnings drop.

But here are some cold, hard facts about Sears and Goodyear. Even if these companies rebound with a vengeance, folks who bought these companies a few months ago will not do as well as those who are buying them now, who may or may not do as well as people who buy them next month.

Worrying about that won't improve your returns, but failing to realize that such things come with the territory -- that's the 24%-average-return territory -- might cause some of you to conclude that there is something wrong with the system when in reality, this is just the way it works.

You don't need a crystal ball to see that.

Fool on and prosper!

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