<FOOLISH FOUR PORTFOLIO>
Investing with Rube
Investing Made Complicated
by Ethan Haskel (Cormend@aol.com)
Baltimore, MD (June 2, 1999) -- Let's start off with a little puzzler. What's the next number in the following series?
77, 49, 36, 18...
When my wife and I were presented simultaneously with this challenge, courtesy of Will Shortz and National Public Radio one recent morning, I must confess I started to salivate. I fully expected to handily solve the problem before my wife did. After all, I was the "numbers person" in the family, the scientist who took advanced mathematics courses in college. My wife was the urban studies major, whose feats of digital manipulation consisted chiefly of waving good-bye or making a fist. Imagine my surprise when she solved the puzzle within 15 seconds, leaving me bewildered and scratching my head.
To make matters worse, I couldn't solve the darn thing for the next ten minutes. I tried all the tricks I knew... subtraction algorithms, prime numbers, square roots. Maybe the figures represented the years of major world events, or even the street stops on New York City subway routes. Nothing. In embarrassed frustration, I eventually gave up. Where had I gone wrong?
I was making things much more complicated than necessary. Even my fourth-grade daughter could have told me that all I needed to find the solution was a basic multiplication table. Of course! Seven times seven was 49, four times nine equaled 36, and so on. I was actually hindered by my advanced education and expectations that the answer required multiple complex cognitive manipulations. Freed from all that baggage, my wife painfully showed me that many, if not most, problems in this world can be answered best with simple, straightforward reasoning.
All of which got me thinking about Rube Goldberg (1883-1970), the Pulitzer Prize-winning cartoonist and author. For those of you not familiar with Rube and his quirky contraptions, here's a brief summary, courtesy of the Rube Goldberg website:
"Through his 'inventions', Rube Goldberg discovered harder ways to achieve easy results. His cartoons were, as he said, symbols of man's capacity for exerting maximum effort to accomplish minimal results. Rube believed that there are two ways to do things, the simple and the hard way, and that a surprising number of people preferred doing things the hard way."
For instance, if you have difficulty waking up in the morning, you might want to check out the Rube Goldberg alarm clock, complete with magnifying glass and bowling ball. Or how about a pencil sharpener -- just don't forget to bring your kite and opossum!
It seems that Rube Goldberg's spirit is alive and kicking in the investment world, as well. Here's part of a transcript taken from an interview session on Louis Rukeyser's Wall $treet Week, featuring guest C. Kim Goodwin, portfolio manager of the American Century Growth Fund (assets, seven billion dollars):
EISEN: Kim, growth is obviously a great way to invest, but what happens when [the companies in your portfolio] miss a quarter? What do you do?
GOODWIN: When they miss a quarter, we're out of them. One of the things that we do on the American Century Growth Fund as a team is we really specialize. We talk to the companies, we talk to the management, we talk to competitors, we talk to suppliers. We should be out of a stock before they miss a quarter. We have that, we have enough information, we have enough of a good information stream so that we can basically say, look, it appears that there's an issue, there's a problem on the horizon, and we don't need to be here.
With only 63 names in the portfolio, it doesn't make sense to stay in a name where there's incremental concern at the margin. So if it misses the quarter and we're still there, we're not going to be there afterwards.
My only comment here is a big Wow! That's a heck of a lot of work they're doing, not only on the 63 stocks that the portfolio owns, but perhaps hundreds of others it is considering. That's a lot of talking. I guess all that chat would be worth it if the strategy led to big returns for the large-capitalization stocks she favors. Here are the annualized returns since 1995 for the American Century Growth Fund, compared with the Standard & Poor's 500 Index and Beating the S&P(BSP), through last Friday:
American Century Growth Fund +23.5% Standard & Poor's 500 Index +28.8% Beating the S&P +31.8%Here's one mutual fund that seems to have found a pretty complicated investing system, with results that fall far short of a do-nothing index fund. It's Rube Goldberg investing at its finest, a perfect example of "man's capacity for exerting maximum effort to accomplish minimal results." And to think, Morningstar has rated the fund "above average" with regard to performance! (In defense of Ms. Goodwin, her reign at the fund began in 1997, but that's little consolation for long-term shareholders.)
BSP and the Foolish Four strategies are only minimally more difficult to implement than buying an index fund. Both historically have outperformed the market. Best of all, it's done without bowling balls or kites... and nary a 'possum in sight!
[Editor's Note: Following are the returns of a "paper" Beating the S&P portfolio that Ethan has been reporting on in the Foolish Workshop for many months. The stocks were selected December 31, 1998 and "purchased" in equal dollar amounts to be "held" for one year.]
Beating the S&P year-to-date returns (as of 06-01-99):
Schlumberger (NYSE: SLB) +28.2% Kimberly-Clark (NYSE: KMB) +10.6% Campbell Soup (NYSE: CPB) -20.3% Ford Motor Co. (NYSE: F) -0.5% Bank of America (NYSE: BAC) +6.2% Beating the S&P +4.8% Standard & Poor's 500 Index +5.6% Compound Annual Growth Rate from 1-2-87: Beating the S&P +20.4% S&P 500 +17.7%To see the Beating the S&P stocks for a portfolio starting now, go to Strategy Stocks Live.
$10,000 invested on 1-2-87 now equals: Beating the S&P $100,000 S&P 500 $75,200
One of the latest Fool books is the ultimate guide to Dow Investing and some of its best variations -- order The Foolish Four: How to Crush Your Mutual Funds in 15 Minutes a Year.
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Stock Change Last
CAT - 3/8 58.38
JPM -2 5/8 130.88
MMM +1 1/8 89.31
IP +1 1/16 53.81
Day Month Year History
FOOL-4 +0.13% 2.88% 24.91% 26.77%
DJIA -0.17% 0.17% 15.60% 15.14%
S&P 500 +0.04% -0.54% 5.65% 5.91%
NASDAQ +0.85% -1.54% 10.93% 12.45%
Rec'd # Security In At Now Change
12/24/98 24 Caterpillar 43.08 58.38 35.50%
12/24/98 9 JP Morgan 105.51 130.88 24.04%
12/24/98 22 Int'l Paper 43.55 53.81 23.56%
12/24/98 14 3M 73.57 89.31 21.40%
Rec'd # Security In At Value Change
12/24/98 24 Caterpillar 1034.00 1401.00 $367.00
12/24/98 9 JP Morgan 949.62 1177.88 $228.26
12/24/98 22 Int'l Paper 958.12 1183.88 $225.76
12/24/98 14 3M 1030.00 1250.38 $220.38
Dividends Received $29.45
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