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(Those are the actual prices we paid for GM and EK and the closing prices for CAT and JPM on 12/27/99)
Almost daily I get an e-mail asking either suspiciously or politely how we managed to buy J.P. Morgan at $105 on December 24 when the lowest price for that week was about $126? The answer is easy, but obviously it isn't obvious. J.P. Morgan was purchased on December 24, 1998. (The market wasn't even open on Dec. 24 this year.)
J.P. Morgan and Caterpillar were both renewed this year, and if you look at Today's Numbers below you can see that reflected in the date.
I was puzzled at first by the number of people who were confused, until I realized that Caterpillar was also a renewal stock, yet it had sunk so low by renewal date that one could have come close to purchasing it for that price. I imagine that folks who duplicated our portfolio saw Caterpillar and the other two stocks at a price close to what they paid. Then when they see J.P. Morgan far below what they paid, they thought that something was just not right. I am VERY glad that they asked, though, so that this could be cleared up.
Some folks thought that the return for J.P. Morgan, since it was for 12 months longer than the other stocks, was inflating our portfolio returns. Let me assure you that this is not the case. The Long-Term % Change In Value numbers are shown for individual stocks, but they are not used in computing the portfolio performance. Only the portfolio's actual dollar value is used.
All of our real-money Foolish portfolios are tracked the same way and that, too, may have lead to some confusion. The Foolish Four is unique in that it renews on an annual basis. Many readers apparently expected us to show a return based on the point of renewal. Unfortunately, since the returns are standardized and automated (and we don't want to go back to the dark ages of spreadsheets!), we can't add such a figure right now. The Year to Date number comes close, however.
If anyone wants to see how a Foolish Four Portfolio where all four stocks were purchased on the renewal date is doing, here is how you can track it:
EK 20 65.09
GM 18 73.36
JPM 9 126.50
CAT 24 46.31
You can enter $8 for the commission, if you want to use our rate, or use your own.
There you have it, a customized portfolio that will let you track the Foolish Four as though it were purchased on the renewal date. You can call it up on the My Portfolio or My Fool pages at any time. And you can create portfolios of your own stocks, too, either ones you own or ones you are "watching."
Another topic that has started to pop up is what to do about dividends. Many new investors find these little checks somewhat mysterious. You read about rich people living off their dividends, and now you are getting them, too. Wow. I don't know about you, but mine run to around 25 bucks four times a year.
Unless you asked your broker to put your shares in your name and send you the stock certificates (and I can't think of any real reason to do so), then your dividend checks will be deposited directly into your brokerage account. They can just sit there until you renew your stocks, at which point they will become part of the cash to be reinvested. That's the way we do it and I recommend it highly. No muss, no fuss.
But some folks seem to have a hard time just letting that money sit idle for almost a year. I can respect that. They want to reinvest the dividends in the Foolish Four stocks. That, too, is a fine idea, but only if you can do so at a reasonable cost. The most reasonable cost is from Waterhouse brokerage -- they will reinvest your dividends for you at no charge. That justifies reinvesting IF your account is an IRA. If you are using a taxable account, you might want to consider that every one of those reinvestments creates a stock transaction that will have to be detailed on Schedule D. Think about that for a few moments.
Even in an IRA where there are no tax forms to file, I would only reinvest when the dividends had accrued to around $500 if I had to pay a commission. If you have that much cash sitting around, it would make sense to put it to work by investing in one of the Foolish Four stocks -- say, the one that was doing the best. I wouldn't split it between each stock or reinvest the dividends in the stocks from which they came, though. If you are going to pay to invest the money, invest it where it is likely to do the most good.
And, no, dividends in an IRA account are not taxable (yes, someone asked).
I also get a fair number of tax-related questions. Luckily (for both of us), we have a whole area devoted to tax issues. So if you have questions about taxes, feel free to ask me. If you want the right answer, I suggest Fool.com: Taxes.
Finally, I've been getting many questions regarding the future of the Foolish Four. It's true that I am concerned that the recent changes in the composition of the Dow have altered the nature of the Dow enough to reduce the effectiveness of price-and-dividend-based strategies. The Dow that we tested was composed of stocks that paid significant dividends -- that was a requirement for membership in Club Dow. It isn't any longer. While I think that such a change improves the Dow's relevance to today's markets, it doesn't give us the best pool of stocks from which to select our Foolish Four.
My concern is not that the strategy won't "work" any longer but that its efficiency will erode, bringing returns back closer to the Dow's average return. We will be developing alternative strategies but it will take time to assemble and test the data. In the meantime, a combination of Foolish Four and Beating the S&P stocks might be a reasonable choice for investors who are concerned about the "Dow problem" and are willing to try something that hasn't been tested. We put such a list on Today's Stock Lists for the convenience of those who were asking for it.
My feeling is that limiting the Foolish Four to Dow stocks is fine for now -- after all, we are all in this for the next 20 years, right?
Fool on and prosper!