<FOOLISH FOUR PORTFOLIO>
Foolish Four Triumphs!
Trashes all other Dow strategies!!!
by Ann Coleman
Reston, VA (April 16, 1999) -- We just put up a fresh batch of year-to-date returns for a number of Dow strategies. Check out these numbers! The Foolish Four strategy is KILLING all other Dow Strategies (not to mention the markets in general!) That's right. We're kicking the Dogs, trashing the High Yield 5, and thoroughly pummeling Beating the Dow.
The Foolish Four is ruling the roost, cock of the walk, the STAR.
I don't do this very well, do I? I just can't think of enough superlatives, and bragging is not coming nearly as easily to me as I thought it would. Maybe that's because those first two paragraphs are mostly garbage. Garbage masquerading as The Truth. Every word is true -- but it's still garbage.
Yes, the RP is beating all the other strategies, and by a large margin. But that proves nothing about the superiority of the RP process for picking winning stocks. It's a fluke, and it could just as easily have gone the other way. And that's the truth.
Why am I so reluctant to take credit for this wonderful return? Well, as you may know, the RP strategy calls for dropping the stock with the highest ratio and buying stocks 2-5 on the list. Our old Foolish Four strategies either always dropped the lowest priced stock (Foolish 4.0) or dropped it only when the highest yielding stock was also the lowest priced (Foolish 4.1). Other Dow strategies make no distinction about that lowest priced stock at all. (If you are thoroughly confused, click here.)
Last December 23, when we selected our portfolio for this year, Philip Morris (NYSE: MO) had the highest RP ratio, so we eliminated it from our stock picks. But at that time, it was neither the highest-yielding nor lowest-priced stock. It had the "best" combination of yield and price, which put it at the top of the RP list, but it did not qualify for exclusion in any other strategy. Now, its 34% loss so far this year is just killing all those other portfolios. But not the Foolish Four.
So, once again, why can't I brag about the superiority of the RP method? Because our reason for dropping the top stock is simply because it is easier. There's no great insight, no crushing logic, no devastating numerical construct. It's laziness, pure and simple.
Here is how it came about. Robert Sheard first noticed that when the lowest-priced stock on the high yield list (the Beating the Dow list) was also the highest yielder, the stock was a bad bet. (We call that stock the LPHY to save a few keystrokes.) Last year I went through our 38-year history manually and looked at every instance where a LPHY situation occurred. It happened 7 times. Five of the seven LPHYs lost 19% or more, dragging down the overall portfolio returns significantly. (The other two were average.) It's the too-much-of-a-good-thing phenomenon -- as near as we can tell.
Every year when we had a LPHY stock, it was also the top-ranked RP stock and was automatically excluded from the Foolish Four portfolio. But except for those cases, there was really no problem with the top RP stock, just like there was no problem with the lowest-priced stock on the Beating the Dow list when it wasn't the highest yielder. In fact, it did about as well as the 5th placed stock on the list (which would have taken its place had it been excluded.)
TMF Sandy backtested several versions of the Foolish Four strategy. He tested it with the top stock always included (bad idea), with it always excluded, and with it excluded only when it was the LPHY stock. There was essentially no difference in the backtested returns between dropping the number-one stock every time and dropping it only when it was the LPHY. It was six of one, half a dozen of the other, as my mom, who's arriving tonight for a visit, would say.
Hey, which strategy would you rather explain daily?
We went for the simple solution, and as a result, we didn't select Philip Morris for the portfolio this year. There is a lot to be said for the virtues of simplicity, but as far as our outstanding returns this year go, I think the most important factor was simply dumb luck.
What isn't dumb luck is the Foolish Four's remarkable record over the past 38 years. That is something to brag about. One year -- good or bad -- is just not significant.
There are thousands and thousands of people in the financial community who would like you to believe that their recent performance is the key to riches -- and a good reason for you to give them your hard-earned cash. Here's the moral of this story. Next time someone starts to brag about a can't-fail stock picking system, an unbeatable mutual fund manager, incredible returns from penny stocks, remember this: Never confuse genius with luck.
Fool on and prosper!
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|Recent Foolish Four Portfolio Headlines|
|12/28/00||Modifying Mechanical Strategies|
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|Foolish Four Portfolio Archives »|
Stock Change Last -------------------- CAT +2 1/16 63.81 JPM + 5/8 133.13 MMM + 11/16 79.94 IP - 3/8 55.00
Day Month Year History FOOL-4 +1.12% 22.21% 25.68% 27.55% DJIA +0.30% 7.23% 14.68% 14.23% S&P 500 -0.29% 2.54% 7.62% 7.88% NASDAQ -1.50% 0.91% 13.29% 14.84% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 63.81 48.13% 12/24/98 22 Int'l Paper 43.55 55.00 26.29% 12/24/98 9 JP Morgan 105.51 133.13 26.17% 12/24/98 14 3M 73.57 79.94 8.66% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1531.50 $497.50 12/24/98 22 Int'l Paper 958.12 1210.00 $251.88 12/24/98 9 JP Morgan 949.62 1198.13 $248.51 12/24/98 14 3M 1030.00 1119.13 $89.13 Dividends Received $15.04 Cash $28.26 TOTAL $5102.05
</FOOLISH FOUR PORTFOLIO>