FOOLISH FOUR PORTFOLIO

Monday, December 29, 1997


The Daily Dow
by Robert Sheard

LEXINGTON, KY. (Dec. 29, 1997) -- Wednesday closes out our 1997 books and it's turning out to be a surprisingly typical year for the High Yield Dow Approach. Watching it day-to-day as I do for this column, the impression is that 1997 was an extraordinary year for volatility and turmoil. Let's look at some statistics from this year's results, with numbers through 12/23, and see what the longer-term picture looks like.

The average return for the thirty stocks that were in the Dow Jones industrial Average at the beginning of the year is 17.80%. (Four stocks were replaced in March and, thus, are still included in our January 1997 results. The actual DJIA index is up 19.62% for the year as a result of the replacement stocks' fine performance.)

Sixteen of the thirty Dow stocks performed better than the 17.80% average and fourteen trailed the average -- a pretty fair distribution. In terms of the Dow Approaches, though, every single variation we track in the Dow Area Statistics Center beat the average. That's not unusual in that the Dow Approach usually out-performs the overall index; otherwise, we wouldn't teach it here.

But what you may find surprising is that 40% of the High Yield Ten did not keep pace with the average, yet the variations nevertheless Beat the Dow. The four laggards have been International Paper (NYSE: IP), General Motors (NYSE: GM), Minnesota Mining (NYSE: MMM), and Texaco (NYSE: TX).

If you're a Charles Dickens fan, how's this for A Tale of Two Cities? The vaunted #2 stock on January 1 was AT&T (NYSE: T), which is now the best-performing Dow stock for the year, up 53.36%. Just a matter of days later, however, the #2 position was occupied by International Paper, which soared and then flopped and is sitting on a paltry gain of 7.32% for the year.

That kind of hit or miss with the PPP stock (O'Higgins's term for the #2 stock, the Penultimate Profit Prospect) is exactly why I think putting 40% of one's portfolio in this position is too risky. Sure, if you doubled AT&T, you're thrilled right now. But if you doubled International Paper and skipped AT&T, your 1997 performance has been dreadful. There's always a danger in trying to fine-tune any such strategy too closely. And if the Dow Approach is your sole stock strategy, a 40% concentration in a single stock is a real gamble.

All that aside, 1997 is turning out to be a very typical year, with the high-yield stocks outperforming the larger index and posting gains near the 20% level. If you bought your stocks in January and pulled a Rip Van Winkle until today, you'd see these numbers, smile serenely, and chalk up another fine year. And that's really what this kind of strategy is all about.

Rankings note: Union Carbide (NYSE: UK) edged out Sears (NYSE: S) today as the final stock in the High Yield 10. As always, for complete rankings, please visit our Dow Statistics Center, where the information for all thirty Dow stocks is updated daily.


TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    ---       63.00
GM   +   1/2   59.81
CHV  +2  3/16  77.50
MMM  -   9/16  83.00
           
                  Day   Month    Year
        FOOL-4   +0.80%   2.96%  29.82%
        DJIA     +1.47%  -0.39%  20.84%
        S&P 500  +1.80%  -0.21%  28.70%
        NASDAQ   +1.72%  -3.94%  19.09%

    Rec'd   #  Security     In At       Now    Change

   1/2/97  479 AT&T          41.75     63.00    50.90%
   1/2/97  153 Chevron       65.00     77.50    19.23%
   1/2/97  179 Gen. Motor    55.75     59.81     7.29%
   1/2/97  120 3M            83.00     83.00     0.00%


    Rec'd   #  Security     In At     Value    Change

   1/2/97  479 AT&T       19998.25  30177.00 $10178.75
   1/2/97  153 Chevron     9945.00  11857.50  $1912.50
   1/2/97  179 Gen. Motor  9979.25  10706.44   $727.19
   1/2/97  120 3M          9960.00   9960.00     $0.00


                             CASH   $2210.03
                            TOTAL  $64910.97