When Bad Times Happen
to Good Strategies

By Bob "Sandy" Price

HOUSTON, TX (August 20, 1999) -- Yesterday we looked at the worst one-year and five-year investment returns provided by the market and the Foolish Four since 1961. How could you deal with disaster if it hits again?

One way is to seriously commit to the long term. Suppose you managed to ignore your returns over a 10-year period. Then you would have seen...


All the strategies had their lowest returning 10-year period in 1965 - 1974.

Dow 30: Gain of 21.8% (CAGR of 2%)
S&P 500: Gain of 13.1% (CAGR of 1.2%)
High Yield 10: Gain of 74.2% (CAGR of 5.7%)
Foolish Four: Gain of 118.8% (CAGR of 8.2%)

Not a loser in the group. The first two might still seem painful, though. Luckily, we have the Dow strategies.

Another approach is to combine strategies. An ebbing tide lowers all boats, but a dinghy reacts differently than a yacht. All the above strategies had their worst 10-year period from 1965 to 1974, but the individual years showed much more variety.

All the strategies except the S&P 500 are Dow strategies. We want different strategies, so let's combine equal weights of the S&P 500 and the Foolish Four. Call this strategy the SP/FF.

The worst year for the SP/FF: down 16.5% in 1966.

This beats the Foolish Four (23% loss in 1966) and the S&P 500 (26.4% loss in 1974).

Compound return (CAGR) of the SP/FF: 16.2%, 1961 through 1998.

Compare that to 19.5% for the Foolish Four and 12.3% for the S&P 500.

Worst five-year period for the SP/FF: gain of 7.4%, 1966 through 1970.

Both the Foolish Four's and the S&P 500's worst five-year periods showed losses.

The worst 10-year period for the SP/FF: gain of 65.6%, 1965 through 1974. Compare this to the numbers above.

While the best return comes from the Foolish Four, what you actually hold should reflect your personality. You need to consider how you will react to the ups and downs of the market. If the pain of loss is likely to drive you to sell, then a more moderate approach like the SP/FF would be best for you.

A gain of 65% in the SP/FF would have BEATEN the Foolish Four's 118.8% IF you didn't hold the Foolish Four for the full 10 years. For example, some may have been tempted to quit the strategy in 1970 after two consecutive years of negative returns and losing to the S&P 500 (by 15 percentage points in 1970). That would have been a tough time for faith in the long term.

In the words of Dirty Harry Callihan, "A man's got to know his limitations."

Today's Stock Lists | 1999 Dow Returns

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Foolish Four Portfolio

8/20/99 Closing Numbers
 Ticker   Company   Dly Pr Chg   Price 
CAT  CATERPILLAR INC              Unch.   $60.31
IP  INTL PAPER                   3/8   $54.38
JPM  MORGAN (JP)                  3/4   $132.94
MMM  MINNESOTA MIN'G/MFG          1/8   $96.44

  Day Week Month Year
To Date
Foolish Four .32% -1.18% 5.60% 29.84% 31.77% 52.17%
S&P 500(DA) .98% .67% .59% 9.31% 9.38% 14.61%
NASDAQ 1.03% .50% .37% 20.78% 21.90% 35.17%
DJIA 1.25% 1.16% 4.18% 20.90% 20.63% 33.04%

 Trade Date   # Shares   Ticker   Cost/Share   Price   LT % Val Chg 
  12/24/98  24CAT    43.083  $60.31  39.99%
  12/24/98  14MMM    73.571  $96.44  31.08%
  12/24/98  9JPM    105.514  $132.94  25.99%
  12/24/98  22IP    43.551  $54.38  24.85%

 Trade Date   # Shares   Ticker   Cost   Value   LT $ Val Ch 
  12/24/98  24CAT    $1,034.00  $1,447.50  $413.50
  12/24/98  14MMM    $1,030.00  $1,350.13  $320.13
  12/24/98  9JPM    $949.63  $1,196.44  $246.81
  12/24/98  22IP    $958.12  $1,196.25  $238.13
  Cash: $80.43  
  Total: $5,270.75  

• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

The Foolish Four Portfolio was launched on December 24, 1998, with $4,000. Additional cash is never added, all transactions are discussed and explained publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen once per year using a formula based on dividend yield and price. See The Foolish Four Explained for details.