On a roll...
and standing pat!

by Ann Coleman (

Reston, VA (April 14, 1999) -- What a day! Lest anyone missed it, the Foolish Four portfolio climbed 6.24% today, leaving the Dow Jones Industrial Average and the Standard & Poor's 500 Index in the dust. (Do I sound just a little bit like David Gardner?)

Just one week ago, the portfolio value stood at $4,321.99, and the slight lead we had been maintaining over the Dow and S&P was gone. Today our portfolio closed at $4,898.68, a 13.3% rise in 7 days. OK, that may be fairly routine for the Rule Breaker portfolio, but stodgy old Dow stocks don't usually jump 5%-10% in a day, especially not on a day that was ho-humm for the rest of the market.

Forgive me my enthusiasm. Really, this is nice, but as always, it's the long-term performance that counts. So looking at the longer term... Wow, Caterpillar (NYSE: CAT) is up 40% since we bought it!

Settling back down... it looks like the short-term money movement seems to be away from Internet and tech stocks and back to some of the global companies that got hammered with the Asian and Latin American crises. Certainly Caterpillar and IP are benefiting from the expectation that those countries will again be buying big equipment and paper products, and J.P. Morgan (NYSE: JPM) seems to be out from under the threat of massive loan defaults by emerging nations. This is classic Foolish Four investing, folks.

Even 3M (NYSE: MMM) moved back into the black for us. I guess the world is going to need tape for all that paper IP is going to be selling.

OK, OK. Before you feel obliged dash off an e-mail pointing out that this is not serious analysis, let's get back to Foolish Four Philosophy. As of right now, our portfolio is getting close to the expected long-term average annual return, and Caterpillar is way above average. Should we be thinking about selling while we are ahead?

Do we take the money and run?

I heard this question quite a bit last year, when Kodak (NYSE: EK) was up over 20% fairly early on. Last year, that would have certainly been a good thing to do with EK. After its early rise, it fell back steadily and is now back on the Foolish Four list, still paying a nice dividend and still waiting for recovery.

Without the benefit of hindsight, of course, the answer is never so clear. What I told anyone who asked last year was that the strategy worked better when stocks were held for at least a year and that if you sold every stock as soon as it hit a certain percentage gain, you would be selling companies that may only be getting started with their recovery and putting your money into companies that could easily be months or years away from that point.

I still think that that is good advice, but that is just my opinion. We have not performed any kind of backtest that would tell us whether a strategy based on selling after a certain increase might be better over the long term than simply holding for a prescribed time period. It might well prove to be more efficient. We just don't know.

We do know that any set holding period of less than a year reduced the annualized returns on our backtest. And we know that many, many stocks recover far more than 40% within a single year. Triple digit returns are not unknown. Without those big winners to bring up the average, it's clear that the returns would not look so good. So I am inclined (not to mention obligated by our commitment last December when we started the real-money Foolish Four portfolio) to hang tight.

Still, I wonder. This is one of the things that has been so fascinating about running a portfolio day to day. The backtesting we did taught us much, but it simply took snapshots of the stocks at various points in time. Watching how the Foolish Four strategy plays out in real time is proving to be a learning experience that I suspect will prove equally valuable. So far, we mostly just have questions -- good questions -- but no answers.

Until we get answers, I am standing pat. We know that the one year hold is extremely effective, not to mention really easy. Of course, anyone who wants to mess with the system can certainly adapt it to his own taste. But if your intention was to follow the strategy strictly, then, at this point, our best advice is to relax and enjoy the ride.

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Fool on and prosper!

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Foolish Four Portfolio Archives »  

Today's Stock Lists | 1999 Dow Returns

04/14/99 Close
Stock  Change   Last
CAT  +5 15/16  60.69
JPM  +3  9/16  132.88
MMM  +2  3/8   75.25
IP   +3  5/8   52.25

                Day   Month    Year   History
        FOOL-4   +6.24%  17.34%  20.67%  22.47%
        DJIA     +0.16%   6.39%  13.79%  13.33%
        S&P 500  -1.58%   3.28%   8.39%   8.66%
        NASDAQ   -2.94%   1.86%  14.36%  15.92%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     60.69    40.87%
 12/24/98    9 JP Morgan    105.51    132.88    25.94%
 12/24/98   22 Int'l Paper   43.55     52.25    19.98%
 12/24/98   14 3M            73.57     75.25     2.28%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1456.50   $422.50
 12/24/98    9 JP Morgan    949.62   1195.88   $246.26
 12/24/98   22 Int'l Paper  958.12   1149.50   $191.38
 12/24/98   14 3M          1030.00   1053.50    $23.50

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4898.68