FOOLISH FOUR PORTFOLIO

Tuesday, December 30, 1997


The Daily Dow
by Robert Sheard

LEXINGTON, KY. (Dec. 30, 1997) -- If you missed the Fool Portfolio report last night, David Gardner announced a policy change for the Foolish Four model. As the model we track here is devoted to that approach, let me try to anticipate some of the inevitable questions you might have.

First, what changed? Actually, not all that much. Tom and David have decided to revise the Foolish Four model to reflect the research I've done since The Motley Fool Investment Guide was published. If you've been a long-time reader of this column, you'll be familiar with that research, which led to my Dow Approach variation called Unemotional Value. Starting with our 1998 Foolish Four model, the official variation we'll be using is what we've been calling the Unemotional Value Four. This approach is featured prominently in my own forthcoming book, The Unemotional Investor, which Simon & Schuster will be releasing in late April or early May. (If you want the first copy available, Amazon.com already has the title listed on its site and is accepting advance orders. The sub-title is listed incorrectly, though. It should read "Simple Systems for Beating the Market.")

This approach is a simple compromise between the original Beating the Dow and original Foolish Four approaches. To identify the UV4 (new Foolish Four) stocks, take the list of the ten highest yielding Dow stocks and then create a second list with those ten stocks sorted in ascending order by price -- the Beating the Dow list. (Check out our daily Current Dow Order to see my versions of these lists.)

If a single stock is on top of both lists (that is, it's the lowest-priced stock of the ten as well as the stock with the highest yield), throw it out and buy the next four stocks from the Beating the Dow list in equal-dollar amounts and hold for the year.

If the same stock is not atop both lists, don't throw anything out. Buy the top four stocks on the Beating the Dow lists (in equal-dollar amounts) and hold for a year. Most of the time this will mean you will simply include the top four Beating the Dow stocks (or five, or six, if you like). But our historical database shows that very often when a stock is both the highest yielder and carries the lowest stock price, it's headed for a big disaster and warrants us skipping it. The rest of the time, it's a good idea to hold that cheapest stock.

Why the switch? History shows that the UV4 has actually done better than the old Foolish Four. Since 1961, the old Foolish Four has returned an annualized gain of 17.44% while the UV4 has returned 18.11%. Even without any over-weighting of positions, then, the UV4 has proven more productive and more consistent. It doesn't rely on the swing for the fences associated with placing 40% of your money in a single stock.

I have also argued many times that the over-weighting associated with the old Foolish Four takes on too much risk for a single stock. With 40% of one's portfolio riding one pony, any kind of stumble wrecks the race for you. In buying the new Foolish Four in equal-dollar amounts, the most you'd have exposed to a single stock is 25% (and that's if you aren't building a larger and more diversified portfolio around your Foolish Four core.)

This announcement was supposed to be included in the Gardners' new book, You Have More Than You Think, which came out this past weekend, but somewhere in the copyediting process the two crucial paragraphs describing the change got cut from the manuscript.

What does this mean if you have recently updated to a new Foolish Four group using the old method? Nothing. The method hasn't suddenly changed or become flawed. We've simply decided to modify it to reflect the better long-term results of the UV method and the reduced risk of not doubling up on a single stock. As David wrote last night, it's like trading away Babe Ruth to get Hank Aaron. Both had terrific stats; we're just going with the younger, stronger slugger. In fact, I might even have opted for someone like Pete Rose. He didn't hit all that many dingers, but he seemed always to get on base.

In fact, if you really want to over-weight anything, and I still don't recommend this, doubling the value of the first two stocks in Unemotional Value has produced a far-superior return since 1961 than the old Foolish Four favorite -- the PPP stock. That's a method we call the juiced UV, or UV4+. Again, I don't endorse the approach and we won't be doubling any of the positions in our Foolish Four model tracked in this area.

Starting today, then, Fools, the daily rankings for the top ten stocks (which are calculated in exactly the way they've always been) will include highlighted stocks based on the new Foolish Four method (check marks on the AOL site and asterisks on the website). Those are the Foolish Four stocks you would include if you were to begin now. Our own model will begin 1998 with the current rankings at tomorrow's close and then hold those four stocks throughout 1998, regardless of how the daily rankings change throughout the year.

I hope this answers most of the questions you'll have, and please refer new readers to today's column if you run across anyone in the hallway wondering what the heck happened to the Foolish Four. Fool on!


TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    -   7/16  62.56
GM   +1  1/2   61.31
CHV  +   9/16  78.06
MMM  ---       83.00
           
                  Day   Month    Year
        FOOL-4   +0.22%   3.19%  30.11%
        DJIA     +1.59%   1.19%  22.76%
        S&P 500  +1.83%   1.62%  31.06%
        NASDAQ   +1.82%  -2.19%  21.26%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  479 AT&T          41.75     62.56    49.85%
   1/2/97  153 Chevron       65.00     78.06    20.10%
   1/2/97  179 Gen. Motor    55.75     61.31     9.98%
   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  29967.44  $9969.19
   1/2/97  153 Chevron     9945.00  11943.56  $1998.56
   1/2/97  179 Gen. Motor  9979.25  10974.94   $995.69
   1/2/97  120 3M          9960.00   9960.00     $0.00


                             CASH   $2210.03
                            TOTAL  $65055.97