The Foolish Four doesn't pick stocks like our other portfolios, and is by definition not a buy-and hold strategy. But the same principle still applies. In this case, it is a strategy you are committed to rather than individual stocks. All mechanical strategies are subject to periods when they don't work well. But staying committed, if you believe in the strategy, is still an investor's best bet.
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Oh, you don't think so? You think that one day is meaningless and month-to-date numbers are absurd three days into the month? Darn, you got me.
Let's talk about what it means to invest for the long term. In our other portfolios, buy and hold means you make a long-term commitment to a stock. When you make a commitment to buy and hold a stock, you do so with (we hope) the understanding that the stock will have good times and bad. You research it as thoroughly as you can and you make a decision to buy based on how you expect the stock to do over the next several decades, not months.
This is important, not because it sounds good -- loyalty, commitment, perseverance, and all that -- but because it works. And, it works even when some of the stocks you stick with end up losers. The reason it works is because that sense of commitment is what keeps you in your big winners even when they are having a bad year.
Take the Rule Breaker Portfolio, for example. Everyone likes to second-guess that portfolio. It's a national sport by now. The Rule Breaker has had winners and losers, and some winners that collapsed and became, if not losers in terms of negative returns, at least losers in the sense that they fell from great heights. (See the sell report for Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> for one good example.) The second-guessers love to point out how much better off the portfolio would be if it sold Iomega earlier, or @Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %> while it was up. Or Celera <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRA)") else Response.Write("(NYSE: CRA)") end if %> when it spiked, or...
But, my point is that staying committed to a stock over the long term, even when it turns out to be a mistake, is still the most efficient way to invest -- until we perfect that crystal ball, anyway. Because, no matter how smart you are at picking stocks, they will all have times when they drop. Some will keep dropping, and some will recover and rise to new heights. You will sell the bad ones eventually, as soon as it is clear that there is little hope of recovery, but that's not a conclusion you want to jump to.
What is the point of jumping out of a stock that is underpriced relative to your expectation of its long-term performance and into another stock that you hope is underpriced relative to your expectation of its long-term performance? It's when you lose faith in the long-term performance of the company that you should start to think about selling.
Of course, you can do better if you sell a stock that is never going to recover as soon as the first hint comes over the ticker. Of course, you can make a killing if you sell a stock when it spikes and buy it back when it drops. The problem is that when you operate under that investing philosophy, human beings (not you of course, just the rest of us) tend to make more bad calls than good. Keep a record of your favorite pundit's "buy," "sell," and "hold" recommendations for a year or so if you don't think that's true.
There are many legitimate reasons to dump a stock. Sometimes you have to sell one just to raise cash to buy something you like better. Sometimes it clearly is no longer the company you expected it to be. But, a true long-term investor is content to examine his reasons for holding a stock every quarter, not every day.
The Foolish Four doesn't pick stocks like our other portfolios and is, by definition, not a buy-and hold strategy. But, the same principle still applies. In this case, you are committed to a strategy, rather than individual stocks. All mechanical strategies are subject to periods when they don't work well. All mechanical strategies carry with them the possibility that the market will change in some way that makes them ineffective.
After five years of tracking the Dow, but not beating it, the Foolish Four strategy is having a bad year. Some investors who bought last year and happened to get Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> or Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> are having even worse years than our online portfolio would suggest.
There is a lot of criticism about the Foolish Four floating around these days, and much of it has merit. We are doing additional research into the foundations of the strategy. (For an interesting take on the value of statistics, see yesterday's Rule Breaker report written by Paul Commins, professional statistician turned Fool.) But, in the absence of definitive answers, and in light of the way the strategies performed prior to the publication of Beating the Dow and for five years after, I don't see any reason to discount the strategy yet. There are lots of reasons to be asking questions, though.
But this year's performance isn't one of them. We could be having the worst possible year, and it would be no more relevant to the long-term validity of the strategy than this week's performance is to our annual return.
That said, if you have serious doubts about the strategy, you probably should get out of it. Not because it is down, but because no one should stay with an investment that they don't believe in and weren't prepared to stick with for better or worse.
Fool on and prosper!