FOOLISH FOUR PORTFOLIO

<FOOLISH FOUR PORTFOLIO>

What I've learned
Reflections on the Foolish Four

by Chris Rugaber (TMF RFK@aol.com)

ALEXANDRIA, VA (July 20, 1999) -- Not that I expect any rending of garments or gnashing of teeth, but it looks as if this will be my final Foolish Four portfolio column, at least for some time. Please, be strong.

As I mentioned two weeks ago, I also edit our new monthly magazine, appropriately titled The Motley Fool Monthly, and our weekly newsletter, The Weekly Fool. (Yes, those creative names took weeks for us to develop.) These publications will pretty much take all my time, so while I will miss writing a weekly article in this area, I also look forward to focusing on these products (which, by the way, you should all subscribe to). They provide excellent, regular doses of Foolishness for those who don't have time to make it to our website every day.

Tonight I thought I'd share a few of the things I've learned while writing about the Foolish Four over the past ten months.

First, do your homework. If you want to really understand this approach, after reading our basic content, be sure to check out our Dow Investing/Foolish Four message board. As with most boards, there is some of the digital equivalent of fluff or static, but on the whole, the signal-to-noise ratio is high. Just understand that there will always be "newbies" on the board asking whether "now is a good time to begin" even as you endeavor not to be one of them.

You don't have to be one of them because you can go to the FAQ, or frequently asked questions list, which is linked at the bottom of every individual post on our board. The FAQ was not compiled by an "official" Fool, but by Dave Goldman, a registered Fool who has done a tremendous service by preparing the FAQ on his own time (with early help from fredochs). Regular participants on the board frequently refer new Fools to the FAQ, which some see as dismissive. It's not. To get a sense of the questions that have been answered before -- and many, many questions have been answered before -- please check the FAQ.

After doing that and reading a few days' worth of posts, feel free to post any question you may have, and you're likely to get some very helpful answers. We've got some brilliant Fools on this board, many of whom are way ahead of us in their testing of data and methods. Many Fools on the board were using the RP formula, for example, long before we made it the "official" Foolish Four. Critics can laugh at all our different strategies and adjustments, but when you have a community of people putting their minds together to find the best approach, you better not be complacent. Change is inevitable. (Though let's stick with the RP for a little while at least, OK, guys?)

Second, don't sweat the details. Plenty of people want to know if they could drop one aspect of the strategy, or add another, or if stocks 1-4 on the RP list are better or worse than 2-5, and what about Philip Morris?! Remember, at its most basic this strategy is simply about buying high-yielding stocks from among the 30 Dow companies, which are large and multinational and therefore likely to be safer than other value stocks. While the details are important, and you should understand them, if you, for example, accidentally buy the 6th stock on the RP list rather than the 5th, the world's not over. You probably still have a perfectly good investment.

Third, now is the time. As mentioned earlier, "When should I start?" is the most frequently asked question of all. The answer is: when you've done your homework, you understand the strategy, and you have decided how much you want to invest in it. (I based this on the answer DHatch gives on our board.) Our FAQ discusses the "Which month is best?" question, but the short answer is that, after meeting the above conditions, now is the time.

And do not worry about whether the Dow is at 11,000 or 15,000 or whatever. Former Fool Robert Sheard, who once oversaw the Foolish Four and Workshop areas, was constantly being asked whether the market was "too high" -- back when the Dow was at 4,500, and then when it was at 6,000, and then 7,000, and so on. Don't wait for a "correction," or you may never start.

Fourth, consider moving on to fundamental analysis. Many of the Foolish Four message board regulars counsel new Fools to look into various Workshop screens if they want to go beyond the Foolish Four (which many do, when they have the cash).

If that's to your taste, go for it. But I would encourage everyone to also head over to our other portfolios, where you will see our writers analyzing individual companies and their business models, industries, and financials. While you may not always have time to do so, it's a great thing to be able to look at income statements, balance sheets, and cash flow statements and understand what they're saying. If you're interested, be sure to check out our Fool's School area on how to read a balance sheet, as well as books in FoolMart such as our very own Motley Fool Investment Workbook, for more info.

Finally, the criticism is bunk. Like clockwork, every few months some financial hack with a column decides to go after the Foolish Four, with Money magazine's Jason Zweig being the most recent example. Most of the criticism is as familiar and routine as Barron's predictable attacks on Amazon.com. Even though some of our strongest critics acknowledge that investing in high-yield stocks is a legitimate value approach, our use of low share price as an additional selective criterion is one of the focal points of the attacks on the Foolish Four.

If you've done your homework, you know that the RP formula, in addition to dividend yield, uses the square root of the share price because some studies have shown that it correlates closely with the beta, or volatility, of a stock. Our critics usually simply scoff at the notion that price has any relevance, though they cite no relevant studies.

Readers will have to draw their own conclusions for now, keeping in mind the historical track record for this approach. But also remember that price is de-emphasized in the RP formula. When you square the dividend yield and divide by price, you are placing more emphasis on yield, whereas when you first order by yield, then by price, as we did with the earlier Foolish Four calculations, price is almost as important as yield. We've already seen anecdotal evidence of how the RP formula makes it much less likely that a company will enter the Foolish Four just because of a stock split, for example.

One day, we'll have to narrow down our multiple responses to our various critics into one or two concise articles, but for now we can just be glad that thanks to the negative coverage elsewhere, it's much less likely our strategy will ever become "too popular."

Thanks to Ann Coleman for her help in editing the articles I wrote, and to everyone who e-mailed me with their thoughts. Fool on!

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07/20/99 Close
Stock  Change   Last
--------------------
CAT  -   1/16  60.19
JPM  -4        134.00
MMM  +1  1/8   89.44
IP   +1  3/16  54.06


                  Day    Month   Year   History
        FOOL-4   +0.08%   1.27%  27.36%  29.26%
        DJIA     -1.71%   0.23%  20.55%  20.08%
        S&P 500  -2.17%   0.32%  12.61%  12.88%
        NASDAQ   -3.47%   1.73%  24.60%  26.31%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     60.19    39.71%
 12/24/98    9 JP Morgan    105.51    134.00    27.00%
 12/24/98   22 Int'l Paper   43.55     54.06    24.14%
 12/24/98   14 3M            73.57     89.44    21.57%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1444.50   $410.50
 12/24/98    9 JP Morgan    949.62   1206.00   $256.38
 12/24/98   22 Int'l Paper  958.12   1189.38   $231.26
 12/24/98   14 3M          1030.00   1252.13   $222.13

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5170.25