By Ann Coleman (TMF AnnC)
February 10, 2000

One of the perplexing things I've been trying to deal with as we watch our Foolish Four investments in real time is just how much of a difference the start date makes. Since our database only contains monthly price information, we don't have any way to model more than 12 portfolios per year. Therefore, we don't have any real way to look at start date variations.

Of course, any investor faces this dilemma. Buying the right stock at the wrong time can wreck your short-term returns. That's probably why so many investors spend so much time watching charts, reading the news, and staring at their tea leaves.

In this area we have been saying that it doesn't really matter when you start, the important thing is to get started. That's good advice because, over a five or ten year time period, the differences caused by starting on the "wrong" day become insignificant. And there's no way to know when that "right" day is, anyway. What seems to be a high price, could, from the viewpoint of one year later, turn out to be the lowest price of the year. And vice versa.

So I stand by that advice, but I worry about it. I worry because most people are just not very good at taking the long-term viewpoint if they have a bad experience early on. If you've been picking stocks for 20 years and one goes down 70% in two months, you can shrug your shoulders and recognize that these things happen. But if it was your very first stock pick, it might be a long time before you pick another. If your first experience with a mechanical investing strategy is a bad one, all of the backtesting and other examples in the world might not make up for that.

With Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> and Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> still wreaking havoc in many Foolish Four portfolios, I hear from a fair number of people who are discouraged by their first Foolish Four experience. How much of this is due to the luck of the draw, how much it is due to the recent problems with the Dow, and how much it is due to the fact that Sears and Goodyear may simply be taking longer to turn around, is very hard to tell. There's no doubt that the Foolish Four has not been performing as expected for the last several years, even without the handicap of Sears and Goodyear.

One piece of the puzzle has been supplied by a Foolish Four reader, John Barrasso. This fascinating piece of work tracked 22 separate Foolish Four portfolios. Each one started in December, 1998, and was held for a year and a day. The results are presented below:

Date in   RP2  RP3  RP4  RP5  CHANGE
12/01/98  IP   JPM  GM   CHV  17.33%
12/02/98  IP   GM   CHV  CAT  13.40%
12/03/98  GM   IP   DD   JPM  22.29%
12/04/98  CAT  IP   GM   DD   14.93%
12/07/98  CAT  IP   GM   DD   10.13%
12/08/98  IP   CAT  S    GM    3.87%
12/09/98  IP   CAT  JPM  DD   16.32%
12/10/98  IP   CAT  JPM  DD   19.14%
12/11/98  JPM  IP   CAT  DD   20.45%
12/14/98  JPM  CAT  GM   IP   24.52%
12/15/98  CAT  JPM  IP   GM   21.33%
12/16/98  MO   JPM  DD   IP    7.03%
12/17/98  CAT  JPM  IP   DD   19.62%
12/18/98  CAT  JPM  IP   MMM  22.88%
12/21/98  CAT  JPM  MMM  IP   20.21%
12/22/98  CAT  JPM  MMM  IP   23.46%
12/23/98  CAT  JPM  MMM  IP   21.90%
12/24/98  CAT  JPM  IP   MMM  20.58%**
12/28/98  CAT  JPM  S    IP    7.40%
12/29/98  CAT  JPM  S    GT  -12.63%
12/30/98  CAT  JPM  MMM  S     7.22%
12/31/98  CAT  JPM  MMM  DD   18.87%

**Our "official" portfolio

The returns are for price changes alone and don't include dividends. (Dividends would add about 2-3% to the return.) The first thing I noticed was that our official portfolio did pretty well, but wasn't the best. The 12/14 portfolio with General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> instead of 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> beat us quite handily. Well, we have GM this year, let's hope it does as well.

Then there are the portfolios with Goodyear and Sears. Those are the ones with single digit returns, or, in the case of 12/29, which got both of them, negative returns. The average return for all portfolios was around 15%. That's not good. Another way to look at it, though would be that only 8 out of 22 days actually underperformed the average. Given that there is always an element of chance related to the day that you pick to invest in any stock, those odds don't strike me as bad.

It looks like the advice to just get started is sound, especially when you consider that every year your returns will tend to get closer to the average. That's why we keep saying, "Think long term."

What does strike me as bad is the overall performance compared to the market. Yeah, if you add in the dividends, most days either beat or came close to the Dow and S&P last year. But we expect to do much better than that.

No, folks, these returns are not encouraging, at least not when the market is roaring along like it has been. But then we've suspected for some time that this strategy has not been performing up to par. One of the problems may simply be the roaring market. The strategy has always done best after a period of underperformance. When the market recovers, the Foolish Four has recovered much more strongly. Much of the outperformance in our database is due to this phenomenon.

Maybe we need a bad year. Just kidding! I don't want to see this wonderful market end anymore than the next person, but if it does, I will be dumping all my spare cash into mechanical strategies.

In the meantime, we will be testing the strategy on non-Dow stocks to see if the whole low price/high yield concept will be validated or not. If it is, we will have a bigger pool of blue chip stocks to pick from. It looks like we need it.

Fool on and prosper!