<FOOLISH WORKSHOP>

Before Investing in Unemotional Growth      

By Moe Chernick ([email protected])

El Segundo, CA (June 3, 1999) -- Many people come to the Workshop after reading Robert Sheard's book The Unemotional Investor and are all ready to jump into the Unemotional Growth strategy. If you are one of them, let me give you one word of advice. Wait!

Why? Because while Robert Sheard's Unemotional Growth screen has impressive backtested returns, better screens with better results have been found since Sheard's book first went to the publisher's.

For those of you unfamiliar with the Unemotional Growth strategy, it is one of the first mechanical strategies developed by Robert Sheard, the original leader of the Foolish Workshop area. It is based on a monthly screen that uses data from both Value Line and Investor's Business Daily. The UG screen starts with the 100 stocks that are rated "1" for Timeliness by Value Line and ranks them by IBD's EPS (earnings per share) rating. Ties are broken by IBD's Relative Strength rating.

The strategy can be used with either a five- or ten-stock portfolio. The stocks are held for a month, at which time the process is repeated. Any stocks not on the new list are replaced. The five-stock version of this strategy averaged an amazing 41.8% return from 1987-1996.

If you look at the returns here, you can see that UG is an extremely volatile screen that hasn't done very well since 1996, but that's par for the course for UG. The UG strategy appears to score big every few years, which gives it a good average return, but consistency is not a notable characteristic of this strategy.

What are these other screens, then? Well, one of Robert's favorites was a screen he named "Keystone," which we will be discussing next week. Keystone's returns were not quite as high as UG's, but Keystone can be traded once a year, rather than monthly, and the returns are much more consistent.

Since Robert Sheard left the Workshop, two other screens have been developed that are less volatile than UG and have higher backtested returns. They are the Spark5 screen, which looks for stocks with multiple growth characteristics, and the PEG5 screen, which looks for stocks with high relative strength and a low PEG ratio. Not only have these screens shown higher returns, they can also be traded annually instead of monthly. After Keystone, we will examine both of these screens in detail.

For those who like the excitement of monthly trading, Brian Malcom, a Workshop board contributor, just completed a backtest of Relative Strength screens. His backtest showed that the RS-26 Week screen (take Value Line Timeliness 1 stocks and sort by 26-week return) traded monthly has both higher returns and lower volatility then the UG screen.

There's the main reason that many people don't invest in UG. Volatility. The volatility of this screen is tremendous, and while the long-term rewards may be great, the heartburn, for many, is even greater. For example, let's say that in January of 1997 you invested $1000 in the UG stocks. In three months you would have been down to $738. That is a twenty-seven percent loss in three months. Can you stomach this type of loss or worse?

Now you might be asking, how do I find out more about UG and these other screens? A good place to start is with the Workshop Screen Explanations. Next, check out the Workshop Message board.

On the Workshop board, you will be in contact with many veterans of the Workshop area. Almost all of them started with UG, but very few still use it. In fact, if you post a question about UG, they almost invariably will tell you to search for old messages using the keyword "Maalox."

You'll probably want to start with the unofficial Workshop FAQ. This website contains background information from many Workshop board contributors and is a good way to get acquainted with the board. It will help you avoid the embarrassment of asking the same question that someone else asked just yesterday.

Before jumping into any screen, especially a highly volatile, high maintenance screen like UG, use these resources and check out all your alternatives. Get a plan into place, then pull the trigger.

Fool On!