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It's only human nature to pay attention to details and to give more weight to one's own experience, especially recent experience, than to someone else's assertions. Not only is that human nature, it's generally smart thinking. But it has its limitations.
Today, I had a note from someone taking me to task for my comment on Monday regarding the Foolish Four. I wrote: "It's simple, it carries little risk of huge losses, and it deals with very stable, well-known companies."
"What do you consider to be a 'huge' loss?" he asked. "I have two portfolios, each of which have 15 stocks. One of them was rebalanced on 01/10, and included purchases of the then-current FF stocks. Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> is down 27% since then, or 96% annualized. In my opinion, that is a HUGE loss for a 'value' stock such as Caterpillar. As a matter of fact, Caterpillar is the WORST performer of the 15 stocks purchased on 01/10, which included many 'risky' high-tech stocks."
I don't want to give this guy a hard time. We're all learning together here. Sometimes I'm a few grades ahead of my readers and sometimes they are way ahead of me. We learn from each other. I do want to look at what he wrote from an instructional point of view, though, and because I'm sure that many folks share his opinion to some extent.
First, I'd better point out that you can't annualize a loss like you can a gain -- and annualizing short-term gains is pretty silly, too. For example, a 5% gain in a day isn't unusual, especially around earnings time. But annualized, a 5% daily gain is several million percent a year. Even annualizing a 5% weekly gain would give you a return of over 1000% in a year. Also, a loss is not the opposite of a gain. There's no theoretical limit to growth, but for a company with actual assets and a good balance sheet, there is a solid bottom. The factories, machines, brand name, etc., all have real, solid values.
Second, you can't compare these stocks to high techs. As we discussed yesterday, high-tech growth stocks seem invincible right now to many people, but long-term investors remember the Nifty Fifty -- high-tech growth stocks of the '60s, many of which lost around 70% of their value in the 1973-74 recession. Incidentally, that recession is the same one in which the Foolish Four gained over 37%.
But the most important thing here is that I said the Foolish Four portfolio carried little risk of huge losses. That's true. No one is exactly thrilled with Caterpillar at the moment, but this is a short-term PAPER loss that's perfectly in keeping with the way the Foolish Four has always worked. Short term, the returns are very messy, but every five-year period since 1961 has ended up in the black except one -- 1966 through 1970 where the portfolio averaged a loss of less than 1% per year. Individual stocks have lost money, sure, but not the portfolio as a whole over most five-year periods.
As far as Caterpillar's recent swoon goes, the company is down because earnings are down -- not nonexistent. This is a company in a slump, not a death spiral. If you are curious about Caterpillar's financial health, take a look at Caterpillar's Snapshot in our data area. Check out the Estimates and Financials, too. Caterpillar is a typical Foolish Four company, out of favor and beaten down. The fact that any out-of-favor stock gets beaten down some more after you buy it doesn't change its prospects. To assume it wouldn't go down after you buy it would be to assume that the Foolish Four strategy can clairvoyantly pick the very bottom of each stock's slump. It's just not that good, folks.
Watching any investment in real time is very different from the kind of snapshot you get when you look at annual or multiyear returns. The database we have is extensive and thorough and it certainly gives us the Big Picture. But it doesn't give us a very good close-up. That is proving to be difficult for some folks. But in the long run, the annual returns are all that count.
In the meantime, step back a few paces and enjoy the view.
Fool on and prosper!