Messin' With the System
by Ann Coleman
(TMF AnnC)

Reston, VA. (October 21, 1998) -- Philip Morris (NYSE: MO) reported increased earnings yesterday, coming in at a penny per share higher than analysts' estimates. Today the stock had a nice rise in the face of a more or less flat Dow, which is good news for those holding Flip Mo in their Foolish Four portfolios. Eastman Kodak (NYSE: EK) also continued its slow but steady climb back out of the earnings pothole it hit last week.

Everybody likes Kodak moments, but Philip Morris is another story. It ranks up there with politics and religion as a polarizing topic of conversation. So today I reluctantly take on the topic of Your Foolish Conscience, prompted in part by a comment on the Dow Dividend Approach/Foolish Four message board to the effect that an investor's reluctance to invest in a cigarette company was "not Foolish."

It's true that I spend a good deal of time telling people that messing with the system is probably not a good idea. The Foolish Four is a mechanical stock picking system, and to whatever extent past performance relates to the future (a very good question!), that amount of predictability is lost when one starts to change the stock picking parameters.

My caution against messing with the system is based on the fact that we usually have no way to evaluate the possible results of such changes -- not because messing with the system in general is a bad or unFoolish thing to do. If we hadn't been willing to mess with the original Beating the Dow strategy four years ago, the Foolish Four and its many variations and improvements would never have happened.

If someone wants to follow a strategy with the expectation that its performance in the future will be similar to its performance in the past, then changing that strategy without backtesting the change is a bad idea. Even worse is trying to avoid certain stocks because they are losing money, facing new competition, being sued or are simply reviled and spat upon by the masses. It is those very situations (which usually turn out to be exaggerated dangers in hindsight) that are the basis of the Foolish Four's success.

Those kinds of changes are different from the Philip Morris controversy, however. Someone who understands that a change may very well result in lower returns, but who is willing to give that up for whatever reason, can certainly make a mature and perfectly Foolish personal decision to change the set of stocks that the strategy picks to a set that they find more personally acceptable. In other words, to dump Philip Morris.

I did some snooping back through the Dow Returns, and it's quite clear that Philip Morris and the other tobacco stocks have been strong performers. Flip Mo was rarely in the Foolish Four prior to its split in 1997 (the price was too high), but it often made the High Yield 10 and in every year that it did, its performance was better than the average Foolish Four performance.

No question about it -- you skip Philip Morris at your own risk.

But that is the point, isn't it? Anyone who is willing to give up the possibility of higher returns because they don't wish to own a company (it could be any company) with an image that is extremely distasteful to them can certainly do so without being considered "unFoolish." The very essence of Foolishness is taking personal responsibility for one's own investing decisions.

In fact, it is quite easy to skip any company on any of our lists. Our Current Dow Order page (see below for the link) list the High Yield 10 in both yield and price order and the top 10 RP stocks. High Yield 10 investors can switch to a High Yield 9 strategy. Foolish Four and RP4 investors will find their stocks identified on the appropriate list, so it is a simple matter to just select the next stock down if you want to leave out any Foolish Four or RP stock -- just be sure that your reasons and expectations are "Foolish."

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

10/21/98 Close
Stock  Change   Last 
 UK   -   9/16  41.31 
 IP   -   1/2   48.06 
 MO   +  15/16  49.94 
 EK   +   7/8   76.50 
                    Day   Month    Year 
         FOOL-4   +0.23%   1.43%  12.42% 
         DJIA     +0.16%   8.63%   7.73% 
         S&P 500  +0.56%   5.20%  10.25% 
         NASDAQ   +2.17%  -1.13%   6.65% 
     Rec'd   #  Security     In At       Now    Change 
  12/31/97  206 Eastman Ko    60.56     76.50    26.32% 
  12/31/97  289 Int'l Pape    43.13     48.06    11.45% 
  12/31/97  276 Philip Mor    45.25     49.94    10.36% 
  12/31/97  291 Union Carb    42.94     41.31    -3.78% 
     Rec'd   #  Security     In At     Value    Change 
  12/31/97  206 Eastman Ko 12475.88  15759.00  $3283.13 
  12/31/97  289 Int'l Pape 12463.13  13890.06  $1426.94 
  12/31/97  276 Philip Mor 12489.00  13782.75  $1293.75 
  12/31/97  291 Union Carb 12494.81  12021.94  -$472.88 
                              CASH    $754.73 
                             TOTAL  $56208.48