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One of the advantages, if not the chief advantage, of mechanical investing lies in its simplicity. By adhering to a few (hopefully) sound investing principles, within a few minutes a market-beating portfolio can be crafted to satisfy an investor for a year or longer. No fuss. No muss.
Foolish Four and Beating the S&P adherents like to invest in huge, established, multinational corporations whose stocks are temporarily out of favor. These companies represent one particular slice of the investment pie, namely large capitalization "value" stocks.
But beyond these large-cap, value stocks, there's a whole big world out there. When The Motley Fool began, way back in the "good ole days" of 1994, a single "Fool Portfolio" existed. This Fool Portfolio invested in stocks encompassing a wide variety of investing styles, including that of the Foolish Four.
Over the years, the number of Foolish portfolios has expanded almost faster than Carlos Santana's trophy shelf. Each of these Foolish portfolios tend to invest in companies with a unique investment niche. These portfolios represent some of the most discussed and debated collections of stocks in the world today. Thanks to extraordinary input from legions of individual investors on our message boards (which recently passed the two million milestone in number of posts), these portfolio returns have been generally extraordinary as well.
My working hypothesis is that we should be able to take the best of the portfolios scattered around Fooldom to create a mechanical Fool investment portfolio. Such a strategy would distill the best of all Foolish thought, creating a low maintenance portfolio encompassing a wide variety of investment styles. The Fool's Greatest Hits. We'll call this strategy "Beating the Fool."
To build such a portfolio, let's check out the Stock Strategies area. There are currently nine categories of strategies listed here: The Rule Breaker Portfolio, The Rule Maker Portfolio, The Foolish Four Portfolio, The Drip Portfolio, The Foolish Workshop, The Boring Portfolio, The Retiree Portfolios, The NOW 50 Index, and Stock Screens.
From a practical standpoint, I'll include only the first five strategies listed above. The Boring Portfolio currently isn't actively managed at present (although it might be in the future). The Retiree Portfolios invest their stock funds in the Foolish Four, which is already represented. The Now 50 Index and Stock Screens may be useful in developing future mechanical strategies, but they don't immediately suggest a practical method to choose a few good stocks.
We're left with the following five Fool strategies:
I won't delve into the details of how the individual stocks for these portfolios are chosen. Just click on any of the links for plenty more information.
The Rule Breaker Portfolio chooses small upstart companies, often those that are losing oodles of money, in the hopes that one day they will start earning oodles of money. The Rule Maker Portfolio invests in large companies that already are making oodles of money, with the hope that they will earn ten oodles down the line. The Drip Portfolio's investment criteria are substantially different; for example, they include the expectation of dividend growth and stock repurchases. The Foolish Workshop portfolios encompass a wide range of investment styles (more on this next week).
Using a few simple criteria for choosing one or two stocks in these five Fool strategy categories, we should be able to build a mechanical Beating the Fool portfolio, one that contains either five or ten stocks. Sure, there are many ways to create such a portfolio. And that's half the fun.
Next week I'll present one possible Beating the Fool strategy, one that gained 60% last year and is beating the Standard & Poor's 500 by over 20% this year. We'll also discuss some important warnings about this type of investing. Stay tuned!
Beating the S&P year-to-date returns
(as of 02-29-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> -19.1%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> -8.9%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -21.0%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -8.3%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> -14.7%
Beating the S&P -14.4%
Standard & Poor's 500 Index -7.0%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +24.0%
S&P 500 +17.2%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $167,600
S&P 500 $79,500