No second-guessing the Foolish Four!

by Ann Coleman
(TMF AnnC)

Reston, VA (April 26, 1999) -- Snap! That's the bullwhip. Today we're talking about discipline.

Discipline is one of the obvious secrets to good investing. I say it's an obvious secret because everyone says you have to be a disciplined investor, but how to accomplish the actual doing is not so obvious. For the Long-Term Buy-and-Hold (LTBH) investor, discipline can mean thoroughly checking the fundamentals of a company, buying when the price is right, and having the discipline not to sell just because the market takes a dive or the company gets hit with some bad news. For strategy investors it means sticking with the strategy year in and year out. Good years and bad.

In either case, the investor with discipline will most often outperform an undisciplined investor over the long run, even if his strategy isn't perfect or his long-term stock picks are only so-so. That's because the undisciplined investor who buys on impulse, sells on rumor, and expects each stock to be the one that makes him rich (and by the end of the year, too, if you please) is a putz.

Chances are you've made a few of those looked-good-at-the-time, putz-y moves yourself. (Me? Goodness, no, of course not!) Haste is one of the telltale signs of a putzy trade. (How do I know that? Well, I've read about it.) Haste as in, "gotta grab this baby before it gets away from me." Or, "Arrrrrrgggh! It's tanking! Gotta get out before I lose EVERYTHING!" This is White Rabbit investing: No time to sit and contemplate, I'm late, I'm late, I'm late.

Great investors don't usually storm around full of sound and fury, snatching up the phone and barking "get me my broker!" Media images to the contrary, great investors take their time. A LTBH approach like our Rule Makerportfolio involves much disciplined stock evaluation before a stock goes into the portfolio. Once there, the stock is expected to stay put for years.

The Foolish Four is "long term" even though about half the stocks are sold after only one year. The long-term discipline comes from following the strategy year after year after year. If you are a putz who's contemplating a better way, the Foolish Four may bring some much-needed discipline to your investing style. If you can stand to let it. But it seems that following the Foolish Four is also one of those easier-said-than-done things.

We know the Foolish Four works, and we know why. We don't know the results of tinkering with it. That is actually made fairly clear in our writings, I hope. Yet I get questions all the time about selling stocks, either because they've gone down too much or up too much. Caterpillar (NYSE: CAT) and Philip Morris (NYSE: MO) are the two top question generators at the moment. Should I sell MO? It's down 30%. Should I sell CAT now, since it's up 40%, and how much higher can it possibly go?

The answer is, usually, how should I know? Next year, when we see how Caterpillar and Philip Morris ended up, we will know whether it was a good idea to sell now or not. Of course I realize that no one expects me to know the answer, they just want my opinion. Unfortunately, my opinion is that one should not try to second-guess the strategy. When you decide to change the strategy, you are moving away from disciplined investing, and you risk venturing down a rabbit hole.

International Paper (NYSE: IP) is a good example. I was not exactly thrilled to be putting money into IP last December. It had been going nowhere for the last two years, and up until two weeks ago was still going nowhere. If I hadn't been making those trades out here in front of you all, I would have been sorely tempted to skip IP. Today it is up 28% and is our second-best performing stock in the portfolio.

J.P. Morgan (NYSE: JPM) was #2 until today, when it got hit with a five-point drop, possibly related to a loan restructuring by a Mexican steel producer. The steel company has also missed some loan payments, which could certainly affect its creditor's bottom line. Strangely, the story I read said that the lender was unidentified. Was it JPM? Or was this just a case of a guilt by association? JPM was mentioned in the news story as working with the steel company to find a "strategic associate."

Obviously we should SELL JPM NOW!!!!!!!

Fool on and prosper (but pay no attention to that last paragraph!).

Call Your Boss a Fool.

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Today's Stock Lists | 1999 Dow Returns

04/26/99 Close
Stock  Change   Last
CAT  +1  7/16  62.00
JPM  -5  1/8   134.44
MMM  +1  1/16  81.88
IP   +  11/16  55.81

                Day   Month    Year   History
        FOOL-4   +0.36%  22.87%  26.37%  28.24%
        DJIA     +0.27%   9.53%  17.13%  16.66%
        S&P 500  +0.24%   5.73%  10.96%  11.23%
        NASDAQ   +2.37%   7.73%  20.95%  22.61%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     62.00    43.92%
 12/24/98   22 Int'l Paper   43.55     55.81    28.16%
 12/24/98    9 JP Morgan    105.51    134.44    27.42%
 12/24/98   14 3M            73.57     81.88    11.29%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1488.00   $454.00
 12/24/98   22 Int'l Paper  958.12   1227.88   $269.76
 12/24/98    9 JP Morgan    949.62   1209.94   $260.32
 12/24/98   14 3M          1030.00   1146.25   $116.25

              Dividends Received      $29.45
                             Cash     $28.26
                            TOTAL   $5129.77