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I'm a rabid fan of The Motley Fool, and have been studying all the introductory lessons on fool.com, following CNBC and the NCAA. But my brain is getting jumbled from the information overload. Now, however, I believe I'm ready to take the plunge. Here's my plan:
I've decided to invest in the Final Four. The stocks that I am planning to buy are MSU, UNC, UF, and UW. I know that I have 35 seconds to make the trade, or I will be penalized.
Have I grasped the fundamentals?
--March Madness
Dear Madness,
Let's begin with a 20-second time out and talk some strategy.
Sounds like you've been Badgering your brain by focusing on too much hoops action, a common problem at this time of year even around Fool HQ, or so I've been told.
The Foolish Four is an ideal approach for beginning investors, but there are some important things you need to know before you take the plunge, or you may find yourself reaching for the goal only to find Brendan Haywood blocking your shot.
The Foolish Four is currently based on the Dow Jones Industrial Average (DJIA), the world's most famous stock index. (Don't confuse this with Madison Square Garden, the world's most famous sports arena.) Indices are used to measure stock market performance, either for the overall market or individual industries. In the case of the DJIA, you're measuring the performance of the overall stock market by using a group comprised of 30 great American companies like General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>, Exxon-Mobil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XOM)") else Response.Write("(NYSE: XOM)") end if %>, and Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>. Sort of like a Dream Team of stocks. In fact, when the TV networks' nightly newsreaders say "the market's up today," they generally are referring to the Dow.
The symbols that you mention are not in the DJIA. They're the teams that are playing in this weekend's Final Four college basketball tournament. (Your confusion is probably due to the madness of the season.) While a mechanical approach like the Foolish Four requires a lot less effort than thoroughly investigating individual stocks -- or heaving three-pointers over a smothering zone defense for that matter -- it's imperative that all investors do a modicum of research before beginning, or they may find some Gators lurking in the murk.
The Foolish Four approach is built on selecting a group of beaten-down Dow stocks in a mechanical way, and buying and holding them for one year, thereby playing the likely turnaround. (Click here for the exact mechanics.) All you need is a Spartan commitment of just minutes a year for research, which entails not much more than clicking into our Today's Stock List page once a year and figuring out the amount you need to put in to each stock. It takes less time than checking out the box scores.
A short time ago the DJIA changed its composition, adding some big shot Nasdaq stocks like Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Intel. This change, the potential Achilles Tar Heel of the Foolish Four, has given rise to speculation as to whether this approach can continue to beat the market. We are currently researching this question. Until we have definitive data on this topic to the contrary, we continue to believe that the Foolish Four is a good investing technique for those wanting to beat the market over the long term.
If you elect to invest with the Foolish Four strategy, you must realize that the results need to be measured over many, many years. The key to beating the market is earning high "average" returns over the long term, which means that some years the strategy will underperform -- especially in a bull market. The Foolish Four has shown historically better performance at times when the bear is out of hibernation. Therefore, if you're the type of person that needs instant gratification, the Foolish Four approach may not be for you. Ice cream would work, but you wouldn't save much for retirement.
On the other hand, if you'd prefer spending more time watching college basketball, investing in the four great companies that make the Foolish Four may be just the ticket to move your focus from CNBC's ticker to the team whose victory parade will feature ticker tape. If you add some index funds to your investment mix, you'll have a good-looking portfolio that doesn't demand constant monitoring or unnecessary turnovers. Just Cleave to your strategy.
Play a savvy game, and Foolish Four investing can become your Forte.