By
Although 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> and International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> beat both indices, Caterpillar's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> earnings warning a month ago sent the stock back down almost to where it started -- and trashed our returns, too.
We did beat the S&P 500, so I suppose I shouldn't complain, but we failed to beat the Dow, which has roared back from two years of being trampled by the
S&P 500.
The numbers are: Dow, 25.77%; Foolish Four, 22.62%; S&P 500, 19.28%.
Note: Last Thursday's column reports the Foolish Four finishing its first year with a return of 22.10%. The extra half a point reported above comes from some late dividends that had not been added to the online portfolio cash yet. They were in the real-life account, however. Not that it matters a whole lot. We are still smack dab in the middle of the two indices we measure ourselves against.
Then there is the Nasdaq. The Nasdaq did pretty well this year, too. Up 82.71%. I'm not certain, but I think that breaks all records for a market index by a large margin. It's almost unbelievable.
So should we all pile into QQQs next year? (QQQs are index shares that track the largest 100 Nasdaq companies.) Hey, you know me better than to expect a prediction!
Instead of predictions, let's look at some recent history. Over the long term, the Dow and the S&P 500 have almost identical returns, but for the last two years the Dow trailed the S&P 500 by an embarrassing amount. This year positions were reversed. Lately the Nasdaq, fueled by tech stocks, left them both in the dust even though they had great years by any other standard.
Next year? Who knows. The Nasdaq may kill them all again. Then again, the folks who've been predicting an end to the tech boom and the Internet bubble may be right.
As Todd Beaird said in today's Workshop Report:
"Many people are dropping Dow strategies, and they might be correct. However, for now I am sticking with it. Given the tremendous bull market we've been having, one would expect a value screen to underperform the indices. Unfortunately, there's no way to know when this run might end."
In the first tech-stock boom, the Nifty Fifty craze of the '60s, the Foolish Four barely kept pace with the market. When that boom went bust in the early '70s, the Foolish Four outperformed the markets by 30 to 40 percent during the two worst years for investors since the Depression: 1973 and 1974. The catch phrase for that phenomenon, which occurs periodically, is "Return to Value."
I'm not predicting a tech bust. I honestly don't believe it will happen. But, I have been wrong so many times in the past that I don't dare trust my instincts.
If you are disappointed in the Foolish Four's return, by all means, diversify into other strategies. That's good advice at any time. In our basic investing guidelines, The 13 Steps, the Foolish Four is an entry-level strategy, one up from an index fund. If you think you've learned from it and are ready to branch out, go for it. Just don't forget about 1973.
In case you missed it, we discussed some of your options a few weeks ago in The Rest of the Universe and A Walk on the Wild Side.
However, when I say "disappointed in the Foolish Four's return," I'm not talking about short-term returns for those of you holding Sears and/or Goodyear Tire -- a drop in the early months is not unusual behavior for these stocks. It might be unpleasant to live through, but high volatility during the first months has always been a feature of this strategy, and many stocks need two or three years to get turned around. Like Caterpillar.
Someone wrote to me recently asking if I still believe in the Foolish Four. Yes, Virginia, I do believe that the Foolish Four is a viable long-term strategy. However, I also think that it needs to be expanded to a larger universe of stocks than the Dow. The Dow is shifting its emphasis from companies with relatively strong dividends to lower-dividend companies, and that will naturally reduce the number of value companies available to pick from. But they are still out there.
From the Beating the S&P strategy, we know that the strategy has worked outside the Dow for at least the last 13 years, and we will be testing it over a much longer time period and a much larger pool of stocks in the next few months. I don't know what we will find, but I expect the inquiry will turn up some very interesting surprises. I hope you are along for the ride.
Fool on and prosper!
The Foolanthropy Homestretch: