By Ethan Haskel (TMF Cormend)
February 23, 2000

One of my secretaries at work has a sign on her wall that reads:

I can only please one person per day.
Today is not your day.
Tomorrow isn't looking too good either.

We Foolish Four (FF) and Beating the S&P investors can certainly relate. We're not having a very good year this year. And some investors have a lot of questions about next year as well.

In order to gain perspective on the situation, let's look at the Foolish Four's lean years. Here's a list of all the years since 1961 that the Foolish Four underperformed the Standard & Poor's 500 Index, our favorite performance gauge. These returns represent those for portfolios started at the beginning of January.

Losing   Foolish 4     S&P 500
Year     Return (%)  Return (%)
1961          20.5        26.9
1963          18.6        22.8
1966         -22.9       -10.1
1970         -14.2         4.0
1972          16.6        19.0
1979          17.7        18.4
1980          22.7        32.4
1990         -17.6        -3.2
1997          19.5        33.4
1998          15.6        28.7

Since 1961 (the first year included in our newly updated Dow Dividend Spreadsheet), the Foolish Four has underperformed the S&P 500 in 10 out of 39 years. About one year in four we're not up to snuff.

The underperforming years have been pretty evenly distributed over time. With the exception of the 1980s, each decade has had three losing years. The "Me Decade" of the 1980s produced only one losing year, that of 1980.

For the 10 losing years since 1961, the Foolish Four has gained an average of 7.7%, compared to an average of 17.2% for the S&P 500. In contrast, for the 29 winning years, the Foolish Four gained 25.7%, compared to the S&P 500 return of 12.4%. The key to the FF's splendid long-term performance is that there have been almost three times as many winning years as losing years. And when we win, we tend to win big.

These numbers reinforce previous observations that the Foolish Four has a tendency to perform relatively less well in those rip-roaring bull markets like we've seen in recent years. Those 10 underperforming years for the FF came mostly (although not exclusively) during exceptional years for the markets, when the S&P 500 gained an average of 17.2%. In contrast, the Foolish Four's winning years occurred when markets performed more in line with historical averages, or 12.4%

We've seen that the Foolish Four has had its share of disappointing years dispersed through the decades. But what might this mean for future years? Does having a bad year indicate that the next year will be a bad one as well? Here are the Foolish Four returns for the 10 years following one of our losing years. For instance, the returns listed for 1961 represent the FF performance for the next year, 1962.

Losing     Next Year's     Next Year's
Year      FF Return (%)  S&P Return (%)  
1961              12.9            -8.7
1963              24.7            16.5
1966              34.1            24.0
1970              19.7            14.3
1972              17.3           -14.7
1979              22.7            32.4
1980               9.7            -4.9
1990              34.8            30.6
1997              15.6            28.7
1998              21.5            21.0

Note that after a losing year, the Foolish Four beat the S&P 500 eight years out of ten, or 80% of the time. Although the numbers are relatively small, this performance compares favorably to those following FF winning years. Following winning years, the Foolish Four beat the S&P 500 21 of 29 years, or 75% of the time. Interestingly, the FF has never had a negative return following a losing year, despite negative returns for three corresponding periods for the S&P 500.

The average return for the Foolish Four following those 10 years of underperformance was 21.3% compared to 13.9% for the S&P 500, representing an average 7.4% performance advantage. For the 29 years following those in which the Foolish Four beat the S&P 500, the FF gained 21.0% versus 13.1% for the S&P 500, an average advantage of 7.9%.

Just because the Foolish Four underperforms one year doesn't necessarily mean it will underperform the next year. Sure, the Foolish Four has had a few bad years recently. But the strategy has had dry spells in the past, and has emerged in fine shape.

That's not to say that there's any guarantee that the Foolish Four or Beating the S&P strategies will continue to function forever. Perhaps there are long-term trends that are making the system obsolete. Perhaps not.

But, just imagine if you became disgusted with the Foolish Four after two consecutive losing years of 1979 and 1980? So disgusted, in fact, that you abandoned the system for dead and decided to invest elsewhere. What would you have missed? For the rest of the 1980s you'd have missed out on a knockout performance, as the FF gained an average of 31.1% compared with 16.6% for the S&P 500.

Perhaps good things really do come to those who sleep!

Beating the S&P year-to-date returns
(as of 02-22-00):

Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>          -22.7%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>            -1.6%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>      -16.4%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>   -10.8%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>        -16.4%
Beating the S&P               -13.4%
Standard & Poor's 500 Index    -8.0%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +24.0%
S&P 500                       +17.1%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $167,600   
S&P 500                      $78,700