Foolish 4 Holding Period
Glendale, CA (June 17, 1998) -- Hear ye, hear ye! There's one day left for the C-K Online Poll. We have over 2,100 votes since the poll opened on Monday -- and we expect another few hundred through tomorrow. If you haven't voted, drop by the poll and help us choose our 8th Cash-King stock (click here: Motley Fool and C-K Online Poll.)
Today is Wednesday, and that means we answer questions from the message boards. I've also been gone for a while, busily writing away on Social Security (a feature that will appear in Fooldom coming soon), and I need to make a few, er, enhancements on some of the comments I made in a couple of columns I wrote in April. Ok, on to the first question:
The Foolish Four Holding Period
The first question I'll cover today, which conveniently ties into one of my enhancements, comes from George, writing under the name of "mosaics" on the Web. He writes:
"In the intro to the Cash-King portfolio where you guys suggest a combination of Dow stocks with Cash-King investments, I read:
With the Dow stocks, we'll rotate our holdings every 18 months to take advantage of the reduction in long-term capital gains rates.
Hey, I thought the Foolish Four and other Dow Approach portfolios were based on annual re-allocations. What have I missed?"
George, you missed some recent changes to the tax laws and subsequent alterations that were made to the approach by Foolish researchers in the forum. Originally, the Foolish Four was based on annual re-allocations. But then our capital gains tax laws were changed, making it more favorable to hold investments for more than 18 months.
Today, investments held for more than 12 months but less than 18 months are taxed at a maximum rate of 28%. (Gains from investments held less than 12 months are taxed at your normal income tax rate.) And, long-term investments -- held for more than 18 months -- are taxed at 20%. The savings that can be had by holding for the longer period is significant. So a few diehard Fools began backtesting the numbers to see how the approach did over periods longer than 18 months.
Unfortunately, after a lot of backtesting work by a group of people, Robert Sheard published a Foolish Four column suggesting that there were some problems with the 18-month rotation. The work showed that the return from Foolish Four investing, including the RP variation that we're using in the C-K Portfolio, is much higher when stocks are bought in December or January.
Obviously, an investor can't consistently buy these stocks in December or January, while rotating positions every 18 months. So Bob Price (TMF Sandy), the Foolish Four numbers man, is working hard right now on this seasonality phenomenon as we speak. My sense is that in our portfolio, we'll be moving to a 24-month holding period, with our four Dow stocks being purchased in mid-December every two years.
My column back on April 17 about telemarketers really struck a nerve. The mail poured into both my personal mailbox and the Cash-King message board on the Web. Many of the ideas for driving away unsolicited phone salesman were hilarious. I encourage anyone who hasn't had a chance yet to stop by the C-K message folder and enjoy them. However, I would like to give special recognition to vodkajim, who wrote:
I used to be a "financial services specialist" (aka Life Insurance and Mutual Fund Salesman) for a few months. I had to make those horrible cold calls and I hated every minute of it. Here's some advice from the other side:
Since reading VodkaJim's advice, I've changed my tactics for dealing with telemarketers. I like to combine an unpracticed Belorussian accent with an immediate request that they put me on their "Do Not Call" list. It's a good deal of fun. I actually WANT them to call me now!
Day Month Year History C-K +1.68% 2.21% 8.09% 8.09% S&P: +1.80% 1.49% 10.57% 10.57% NASDAQ: +1.33% -0.14% 7.47% 7.47% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 112.25 36.39% 2/3/98 24 Microsoft 78.27 91.00 16.27% 2/27/98 27 Coca-Cola 69.11 80.31 16.21% 5/1/98 37 Gap Inc. 51.09 58.88 15.24% 2/6/98 56 T. Rowe Pr 33.67 34.75 3.20% 5/26/98 18 American E 104.07 104.94 0.84% 2/13/98 22 Intel 84.67 69.19 -18.29% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 71.00 10.36% 3/12/98 20 Eastman Ko 63.15 68.13 7.88% 3/12/98 15 Chevron 83.34 83.69 0.41% 3/12/98 17 General Mo 72.41 69.75 -3.67% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 2469.50 $658.92 2/3/98 24 Microsoft 1878.45 2184.00 $305.55 2/27/98 27 Coca-Cola 1865.89 2168.44 $302.55 5/1/98 37 Gap Inc. 1890.33 2178.38 $288.05 2/6/98 56 T. Rowe Pr 1885.70 1946.00 $60.30 5/26/98 18 American E 1873.20 1888.88 $15.68 2/13/98 22 Intel 1862.83 1522.13 -$340.71 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1420.00 $133.30 3/12/98 20 Eastman Ko 1262.95 1362.50 $99.55 3/12/98 15 Chevron 1250.14 1255.31 $5.17 3/12/98 17 General Mo 1230.89 1185.75 -$45.14 CASH $2037.63 TOTAL $21618.51 *The year for the S&P and Nasdaq will be as of 02/03/98