<FOOLISH FOUR PORTFOLIO>
The Foolish Four Evolves
And a look at holding periods
by Ann Coleman (TMF AnnC@aol.com)
Reston, VA (February 17, 1999) -- There still seems to be a bit of confusion in the land over a few Foolish Four issues. They keep coming up, so, in the interest of keeping everyone on the same page, let's review a few basics.
First, yes, we are using a different process to pick Foolish Four stocks these days. It's called the RP, which stands for ratio procedure. We switched because the RP outperforms our old stock selection method by every single measure. A history of all three of our Foolish Four stock selection methods and a complete explanation for the switch was recently published at The Foolish Four Evolves. Check that out if you are feeling a bit confused.
The most frequently asked question in my mailbox these days is, "Do I have to wait until December to start a Foolish Four portfolio?" The answer is no, you can start any time. (That's why we list the current Foolish Four stocks every day!)
The thing about December is that we found a definite advantage to the December/January period when we compared results of portfolios started in different months. The January portfolio actually outperformed the December portfolio, but both were based on starting and renewing your stocks on the first trading day of the month. (We don't have daily data going back to 1961, so a once-a-month snapshot was all we could test.) The shape of the curve indicated that it probably peaked sometime in late December, and this was confirmed by data that I saw from an independent source that used a December 31 trade date. That's why we suggest that you renew your portfolio in late December.
But that doesn't mean you have to start then. That recommendation is based on AVERAGE returns. Any average can hide a great deal of variety, and we saw a lot of variety in the returns when you looked at each individual portfolio. In fact, January only came in first five times out of a 24 year test period. It came in first, second, or third 11 times out of 24, but that leaves a lot of years for other months to shine. Considering that the worst performing month, June, still had an average return of 14.5% for the RP portfolio, I think it is quite reasonable to start at any time -- just as long as you shift to a December renewal fairly soon.
How do you do that? Well, if you are in a tax advantaged account, you can just switch at the end of the year, or you can do as those in taxable accounts do and hold until the end of the following year. In other words, if you were starting now, you would hold until late December 2000. (Ooooh, it feels so weird to write that!) The reason, of course, is to make sure your gains qualify for long-term capital gains treatment -- you gotta hang on to those babies for a year and a day before Uncle Sam blesses you with lower taxes. (Yep, that's right -- the 18-month holding period was repealed last summer.)
Another advantage is that our database shows that holding for longer than a year usually provides higher returns than holding for less than a year. If you aren't worried about taxes, though, you can decide next December if you want to hold for another year. Holding for exactly a year (or a year and a day) and renewing in December should be the most advantageous strategy for the long term, though.
Did you do your homework? Yesterday I suggested that you might want to try your hand at calculating the price to earnings ratio yourself. Due to the wonders of modern technology, those of you who tried it are getting an extra day to finish! Don't you wish all your teachers had been so considerate?
Fool on and prosper!
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Stock Change Last -------------------- CAT + 1/2 45.75 JPM - 3/16 110.06 MMM - 3/8 76.06 IP -1 7/16 40.50
Day Month Year History FOOL-4 -0.65% 2.47% 0.33% 1.82% DJIA -1.09% -1.75% 0.30% -0.10% S&P 500 -1.43% -4.34% -0.10% 0.14% NASDAQ -2.81% -10.25% 2.56% 3.97% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 45.75 6.20% 12/24/98 9 JP Morgan 105.51 110.06 4.31% 12/24/98 14 3M 73.57 76.06 3.39% 12/24/98 22 Int'l Paper 43.55 40.50 -7.00% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1098.00 $64.00 12/24/98 9 JP Morgan 949.62 990.56 $40.94 12/24/98 14 3M 1030.00 1064.88 $34.88 12/24/98 22 Int'l Paper 958.12 891.00 -$67.12 Cash $28.26 TOTAL $4072.70
</FOOLISH FOUR PORTFOLIO>