<FOOLISH FOUR PORTFOLIO>
Improving on Great
Nothing's perfect, nothing's sacred
by Ann Coleman (TMF AnnC@aol.com)
Alexandria, VA (March 5, 1999) -- I love the RP formula. It's a simple, neat formula that manages to identify some of the best choices from among the Dow's 30 stocks year in and year out.
One of the reasons I love it is that it is "home grown." It was developed right here on the Motley Fool's Foolish Four message board, yet it handily beats our earlier Foolish Four strategies -- as well as the famous Beating the Dow. How can you not love it? Still...
In preparing the returns tables for The Foolish Four: How to Crush Your Mutual Funds in 15 Minutes a Year, I couldn't help noticing that there were a few stocks almost every year that did better than most of our stocks yet had not been picked by any of the strategies. And I wanted them. This is a dangerous frame of mind.
For one thing, no mechanical strategy can possibly identify the BEST stocks to own. I rather doubt that any strategy of any kind can do that. Random events are always going to influence stock prices in ways that cannot be foreseen. Still...
Is there, just possibly, room for improvement?
A number of Fools wonder about that, in fact. Some of them hang out on our Dow Dividend/Foolish Four message board speculating about ways to improve on the RP, and a few have come close. Some write to me with their suggestions. Sometimes I have to write back and say, "Great idea, we tried it a few years ago, though, and it didn't work." Sometimes I have to say, "Great idea, but there's no way to test it." (OK, OK, they aren't ALL great ideas, but at least people are thinking!)
Then there are the ideas that may be testable but require rather complicated programming or the addition of data to our database (not a trivial undertaking!). Some of the things I hope to be able to test eventually are:
*The effect of using the company's P/E or earnings yield (EPS/price) instead of dividend yield (dividend/price).
*The effect of purchasing only stocks that have been "on the list" for some specified period of time.
*The effect of replacing stocks early if they have risen a predetermined percentage rather than waiting for the end of the year.
These and many other questions will be answered eventually, I hope, and may, indeed, lead to the development of newer versions of the Foolish Four strategy. A spirit of curiosity and the willingness to engage in ongoing research is among the contributions that I think the Motley Fool has made to individual investing. It's fun, too -- not to mention profitable.
If you are not familiar with the revisions our strategy has gone through already, you might want to read The Foolish Four Evolves. We have changed the methodology twice already and will continue to do so whenever we find a variation that proves superior.
Being "proved superior" is an interesting process. One of the great things about our message board is that it has attracted some excellent analytical minds. When an idea is proposed, the level of debate is both civilized and rigorous. In many respects, the message board serves as a kind of peer review committee that both tests and tempers the various proposals.
If you are intrigued by this process, the place to discuss suggestions for improvement and to debate such suggestions is our Dow Investing/Foolish Four message board. The wonderful Fools who hang out there have even prepared a FAQ for newcomers so you don't have to worry about asking the same question that was answered last week. Here's the link to it: TMF: The Unauthorized Dow FAQ and Compendium. You can also find it at the bottom of any message page on the board.
Oh, yeah -- good day in the market today, eh? New highs for the Dow and the Foolish Four. But it's just one day (well, two, actually). Quite likely the market will give back some of these gains next week. Or maybe not. Even when we are up, remember, it's the long term that counts.
Still, it's nice to be up and nice to be beating both the Dow and the S&P.
Fool on and prosper!
[Correction to yesterday's Foolish Four Portfolio Report: Yesterday's column included two transposed numbers in the table displaying some of Caterpillar's 1997 and 1998 income statements. Caterpillar's 1998 revenue was in the 1997 column, and vice versa. It is currently corrected in our archives but did cause some confusion yesterday. Our apologies to all our Foolish readers.]
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Stock Change Last -------------------- CAT +1 15/16 49.88 JPM +1 5/8 114.56 MMM +1 15/16 77.13 IP + 5/16 40.38
Day Month Year History FOOL-4 +2.30% 3.38% 4.43% 5.98% DJIA +2.84% 4.62% 6.19% 5.77% S&P 500 +2.31% 3.00% 4.08% 4.33% NASDAQ +1.93% 2.15% 6.59% 8.05% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 49.88 15.77% 12/24/98 9 JP Morgan 105.51 114.56 8.58% 12/24/98 14 3M 73.57 77.13 4.83% 12/24/98 22 Int'l Paper 43.55 40.38 -7.29% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1197.00 $163.00 12/24/98 9 JP Morgan 949.62 1031.06 $81.44 12/24/98 14 3M 1030.00 1079.75 $49.75 12/24/98 22 Int'l Paper 958.12 888.25 -$69.87 Dividends Received $15.04 Cash $28.26 TOTAL $4239.36
</FOOLISH FOUR PORTFOLIO>