By Bill Mann (TMF Otter)
January 3, 2000

One of the issues that led the Motley Fool to consider creating its own index was the question of inappropriate weighting of the other major indices. The Dow Jones Industrial Average is calculated daily based on the price of each company, without any regard to relative size of each component. The S&P 500, on the other hand, measures on market capitalization, which is a preferable scale, but has often been called the "Microsoft Index" for the amount of influence that one company and its $500 billion market cap has on the performance of the S&P 500. The smallest company in the S&P 500, at a mere $345 million market cap, has almost no effect on the movement of the Index, a scenario we sought to avoid.

After several consultations with indexing companies and mathematicians, we elected to use a sliding scale with regression toward the median market cap companies. In other words, we would raise the influence of the bottom dollars for each company and discount the additional dollars beyond a certain measure. Such a methodology will allow the largest companies to increase in market cap and influence without overwhelming the FOOL 50 Index.

The calculations are made based on market capitalization, and the performance of the index will be based on each company's increase or decrease as an investment from the base date. Each company's performance will be assigned a percentage of weight to the index. These weights will be recalculated quarterly, on December 15, March 15, June 15, and September 15, with any mergers or unscheduled changes in the FOOL 50 components being recalculated immediately. The original weightings are based on the market capitalization for each company as of December 15, 1999. See our most recent quarterly report for current weightings.

The method of weighting is simple and elegant. Each company is assigned a market cap and then ordered from smallest to highest and ranked 1 to 50. The 10th and 30th companies are noted. For every company, all dollars of market cap below the level of the 10th company is doubled. For every company bigger than the 30th company, each dollar ABOVE the level of that company's market cap will be multiplied by 0.2. In doing this we give the smaller companies some additional weight while eliminating the need for a firm cap. Note that for Berkshire Hathaway we will track the performance of its B Class shares, which normally differ slightly in performance from the A Class.

As always, we encourage you to post your opinions on the FOOL 50 Index on our discussion board. The next update will be on September 15, 2000. We also have the potential to add a new company should the AOL/Time Warner merger be completed. This is scheduled to take place in November. As this date approaches, we will once again open up the floor to community nominations for the replacement company. The original FOOL 50 was culled from 2700 nominations of 288 different companies.

Fool on!
Bill Mann, on behalf of the FOOL 50 Trusty Trustees

David Braze
Matt Richey
Ann Coleman
David Gardner
Brian Bauer
Brian Graney
Bill Mann
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Chris Rugaber