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RESTON, VA (Jan. 3, 2000) -- If you've been following the current Foolish Four, you have probably noticed that the current stock selections have been changing almost every day over the last week or so. What do you do when you buy the Foolish Four and then the next time you look, Eeek! the list has changed?
You relax. That's the way it works.
Keep in mind that the Foolish Four is based on a formula that includes price. Prices change -- sometimes dramatically. As long as the prices all change more or less the same amount in relation to each other, the RP rankings will stay the same. That, of course, rarely happens. So as one stock rises in price, it will move down relative to the others on the list and another stock will take its place. And vice versa.
That is what has been happening quite a lot lately with International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %>, DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>, Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, and General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> all popping on and off the list. Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>, 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %>, and J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> have stayed pretty consistently on the list but have moved about from one position to another, playing havoc with the Foolish 2 (the top half of the Foolish Four).
What's a Fool to do?
Nothing.
Second-guessing your stock picks is a sure way to drive yourself nuts. If you like such masochistic activities, though, check out the Rule Breaker Portfolio. If you are into the "I shouldas," that one will bring you to your knees. It's much saner to look forward instead (as I tell myself every time I look at the Rule Breaker).
It may not be a very comfortable thought, but all of these various Foolish Four configurations have equal chances of doing well in the coming year -- at least, their chances are equal according to our limited, no-work formula. Some will obviously do better than others. Will your portfolio, which was purchased on a day when Sears had kicked IP off the list, outperform ours? Hey, I hope so! Or maybe DuPont will be the big winner of the year, making any portfolio that happened to include it better than all the rest.
Folks, there is just no way to tell right now. One set of stocks will turn out to be the "best" selection. But you know what? It really doesn't matter which -- the one we bought on Christmas Eve, or the one you bought on New Year's Eve, or the configuration that pops out at the close of trading today. The reason it doesn't matter is that next year, we do it all over again. And the next year, and the next. Over time, it should all even out.
Until and unless someone has the data to backtest every single day of the year (and as far as I know, such price data is not readily available back more than 10 or 15 years, which isn't long enough for me), we just have to assume that one day is as good as another as long as they are in the same general time period.
Keep in mind that the 24.62% results that the Foolish Four (RP version) has generated over the last 25 years are based on "snapshots." Grab four stocks at a moment in time and hold them for a year -- grab four more. The snapshot we have been using is based on prices at the close of trading on the first trading day of the year (which is today, coincidentally).
Other databases that are based on the last trading day of the year show similar returns over long time periods, although in any one year the results may be very, very different. One year, the end-of-the-year portfolio ended up 14 percentage points higher than the portfolio selected one trading day later. But the overall averages were within half a percentage point of each other. (The year-end portfolio was the higher.)
Meanwhile, I worry that someone will have the bad luck to pick an underperforming portfolio one year and let that discourage them from renewing the next year. Despite all of our advice to think long-term, it's only human nature to think, "Hey, it didn't work this year, I'd be crazy to do the same thing again."
If someone will remind me next December, we will take another look at how Sears, DuPont, and GM have done by then. That should be interesting. But not significant.
Fool on and prosper!