Foolish Four Portfolio
The Winter of Our Content?
 Snuggling up with the Foolish Four

By Ethan Haskel (TMF Cormend) (TMFCormend)

What of October, that ambiguous month, the month of tension, the unendurable month?
--Doris Lessing

BALTIMORE, MD (Oct. 20, 1999) -- What of October? Ms. Lessing, the African novelist of British descent, wrote these words in 1952, so it's unlikely she was referring to the whims of the U.S. equities markets. But October market tumbles in 1929, 1987, and last week serve as reminders that the laws of gravity have not yet been repealed. Stocks can, and do, have an annoying habit of occasionally losing value.

The falling autumn leaves often bring investors more consternation than even the thought of all that raking. Does the recent October market swoon, distasteful as it may be, forebode an even more distressing winter of our discontent?

My father and sister, who live in Northern California, chide me mercilessly about the "perfect" weather they've had that day. It seems that it's always 65 degrees and sunny in the San Francisco Bay area. Personally, I love the variety of the seasons we experience here in Maryland. Sure, in a few weeks the vibrant orange and red foliage will come tumbling down. But the bare trees form graceful dendrites reaching to the sky, enhancing the mountaintop views of the valleys below.

As long as one expects and prepares for the extremes -- like those unbelievably muggy Baltimore August evenings, and those classic February ice storms -- we can, as they say, "embrace diversity." Besides, Shangri-La gets boring after a while. It's probably no coincidence that the word "season" can also mean "to add zest or interest to," according to my Webster's.

Life's not all Shangri-La down on Wall Street, either. The stock market marches to its own seasons. The investment climate differs from our natural seasons in that the twists and turns of the market are much less predictable than the cycles in nature. In fact, the self-appointed market weathermen (translation: gurus) have a much worse record than The Farmer's Almanac in divining such patterns.

Let's take a closer look at Wall Street's seasons. Somewhat arbitrarily, I've divided the stock market's annual returns since 1961 (the earliest date in our Dow Dividend Spread Sheet) into four categories, based on market performance. It's instructive to see how the Foolish Four performed during these four "seasons," both in absolute and relative terms.

I've designated summertime as those sizzling years when the S&P 500 returned more than 25%. Wintertime proved downright frosty, indicated by those years in which the S&P actually lost value. The more temperate autumn and spring lie somewhere in between, representing years when the market returned 0-15% and 15-25%, respectively. The table below indicates how the market performed during these seasons, along with the Foolish Four (FF).

Season       # Years   Ave.     Ave. F4    F4 
(S&P Range)     S&P   Return    Return   Advantage
Winter  (<0%)    8    -10.98%   +1.00%    11.98%
Autumn (0-15%)  10     +7.89    +14.56     6.67
Spring (15-25%) 11    +20.62    +29.22     8.60
Summer (>25%)    9    +32.24    +36.24     4.00
Although the correlation isn't perfect, the Foolish Four performed with greatest advantage over the markets during those arctic winters, when it outpaced the S&P 500 by almost 12%. Although the FF performs spectacularly in the summer, with average returns of about 36%, the relative advantage over the general market drops to a "mere" 4%.

How does the Foolish Four maintain its performance as a portfolio for all seasons? The reason probably relates to its uncanny ability to avoid those "disaster stocks" without missing out on those "grand slams."

The returns for stocks during the past 10 years have been unprecedented. In fact, since 1989, we've experienced five summers, two springs, two autumns, and only one winter. Talk about global warming!

It's somewhat comforting to know that, when the wintry blizzards pay us their inevitable visit, our Foolish Four should be there to help keep us warm and snug. It's my own steaming cup of hot chocolate, complete with those teeny marshmallows on top.

Beating the S&P year-to-date returns (as of 10-19-99): 
Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>      +24.3%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>     -0.5%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>     -23.5%
Ford Motor Co.  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>      -7.7%
Bank of America  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>   -8.8%
Beating the S&P                -3.2%
Standard & Poor's 500 Index    +2.6%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +24.4%
S&P 500                       +17.0%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $158,800
S&P 500                      $73,000

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