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Our five-stock Beating the Fool Portfolio, which consists of buying all the #1 stocks from each Fool portfolio, has returned a total of 17.7% so far this year. The ten-stock portfolio, including all of the #1 and #2 Fool portfolio stocks has lost 1.9%. For comparison, the S&P 500 index is down 7.7%.
Our 1999 Beating the Fool portfolios obviously had a great year last year as well. But does that mean that everyone should sell all their current stocks and invest in the BTF 5? Definitely not!
That's the goal of a Beating the Fool (BTF) strategy, whose underpinnings were outlined last week. Let's now move from theory to practice, as we try to write some rules for choosing such a mechanical BTF portfolio.
Last week we noted that there were five diverse strategy sections in Fooldom that would suit our purpose: The Rule Breaker Portfolio, The Rule Maker Portfolio, The Drip Portfolio, The Foolish Four, and The Foolish Workshop. If you're not familiar with these strategies, I'd suggest you click on the link to last week's article, which can quickly guide you to more information.
Before we proceed, we note that one of our five strategies, The Foolish Workshop, doesn't follow a single strategy, but rather covers a whole slew of potential portfolios. We need to choose a representative portfolio from the Workshop. I chose to go with the Keystone 100, our "Foolish 5 Growth portfolio," one of the most widely used Workshop screens. For more information about the Keystone 100, check out Ann Coleman's recent article.
Now that we've found our five Foolish portfolios, how do we go about whittling the list down to five or ten stocks? We need to choose either one or two stocks from each strategy to create either a five or ten-stock portfolio.
For the mechanical investing strategies (the Foolish Four and Keystone 100), the method for selecting one or two stocks is fairly obvious. Since these stock lists are derived from standardized formulas, we'll simply choose the top one or two stocks on each list. For the Foolish Four, the current stock lists can be found to the right of our daily write-ups, or in the Foolish Calculator. The Keystone 100 stocks, derived from Value Line data, change weekly. The current Keystone 100 stocks can be found here.
To find the stocks derived from the other three portfolios, let's keep it simple. For the Rule Breaker, Rule Maker, and Drip portfolios, we'll pick the top one or two stocks that comprise the largest share of each portfolio in dollars. At the end of the daily write-up, these portfolios list all of the stocks they own and the dollar value of each stock. Let's select the stocks from each of these portfolios that contribute the most to that portfolio's value.
Using these simple rules, it's time to construct a Beating the Fool Portfolio. The following table lists the stocks taken from each of the five portfolios at the very beginning of this year, along with their accompanying year-to-date returns as of yesterday. These returns don't include dividends, which are only significant for the Foolish Four and some Drip Portfolio stocks.
2000 #1 #2
Portfolios stock/return(%) stock/return (%)
Rule Breaker AOL -25.5 AMZN -16.6
Rule Maker CSCO +23.3 YHOO -20.8
Drip INTC +40.6 JNJ -26.5
Fool Four CAT -28.2 EK -16.1
Keystone 100 JDSU +78.1 QCOM -27.3
Both BTF portfolios are easily surpassing the S&P 500 this year, and the five-stock portfolio is a superstar. Of course, a few months is way too short a testing period to draw any conclusions.
Let's check out another, slightly longer, time period. The following table lists the Beating the Fool stocks for last year, 1999, along with their returns (again excluding dividends):
1999 #1 #2
Portfolios stock/return(%) stock/return (%)
Rule Breaker AOL +95.8 AMZN +42.3
Rule Maker MSFT +68.4 CSCO +131.0
Drip INTC +38.9 JNJ +11.2
Fool Four CAT +2.3 JPM +20.5
Keystone 100 YHOO +265.3 AOL +95.8
1999 Returns
BTF five-stock portfolio +94.1%
BTF ten-stock portfolio +77.1%
S&P 500 +20.1%
There are probably more good reasons not to invest in a Beating the Fool Portfolio than to invest. Such a portfolio goes against all the rules of a mechanical investing strategy in that it has no long-term track record and cannot be backtested. Also, although there is some diversity provided by the five Fool portfolios, the current strategies are heavily weighted towards growth-style investing. When a bear market in growth stocks hits (and one will, eventually), some of these Foolish high-flyers may plummet faster than Bill Bradley's presidential prospects.
Finally, the existence of a Beating the Fool Portfolio in one sense runs contrary to the very nature of Foolish principles, spelled out in the Foolish disclaimer: "Our aim is not to 'pick a winner' for you, but to teach investing for the long haul." A BTF Portfolio does precisely the opposite; it tells you exactly which stocks to choose.
Those who decide to invest in a Beating the Fool Portfolio place full faith and trust in their fellow Fools' ability to select more winning stocks than losers. Maybe that's good, maybe not. The intention in presenting such a concept was really one of "food for thought," a maintenance-free method of tapping into some of the best Foolish ideas around. Whether it's truly Foolish or foolish, we'll leave you to decide.
For those still interested, these are the current Beating the Fool stocks, as of yesterday:
Portfolio #1 stock #2 stock
Rule Breaker CRA AOL
Rule Maker CSCO INTC
Drip INTC MEL
Fool Four CAT IP
Keystone 100 BEAS NTAP
Beating the S&P year-to-date returns
(as of 03-07-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> -23.6%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> -13.1%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -21.9%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -11.3%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> -22.0%
Beating the S&P -18.4%
Standard & Poor's 500 Index -7.7%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +23.9%
S&P 500 +17.0%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $167,600
S&P 500 $78,900