FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
More on Dow Changes
Do they have to keep messing with it?

By Ann Coleman (TMF AnnC)

RESTON, VA (Oct. 28, 1999) -- Now, I'm getting worried. After spending some more time with the Dow Spreadsheet and reading our message board and my e-mail, I am starting to think that there may be more to this Dow change than I first expected.

For one thing, I've been looking at the actual changes and their timing instead of the averages that are so blithely quoted, and it seems pretty obvious that the pace of change is accelerating. Dramatically. Averages tend to hide such things. For example, although it's true that the Dow has announced changes on average every four years, it's also true that if you discount changes due to mergers, only seven stocks were replaced from 1961 through 1990, a 30-year period, but 11 stocks have been replaced in the last nine years. That puts a rather different spin on things.

Many, many good questions have been asked and suggestions made on our Dow Investing/Foolish Four message board, and I am trying to sort through them and see which can be tested.

The basic problem is that the foundation of the Foolish Four, the reason we have confidence in it, is our solid 38-year database. I will be one of the first to explore new ideas, but one of the last to abandon something that has such a track record -- at least until it is clear that we are running on a different track.

It will take time to evaluate this situation. We have the data to test some of the alternative models suggested, including combining the Foolish Four with the Beating the S&P strategy, or the Keystone strategy developed in our Workshop. That database doesn't go back as far as our spreadsheet, though, and testing will take time.

Keep in mind that IF the Dow's trend toward lower-dividend stocks does make the strategy less effective, the most likely result is that the returns will be closer to the Dow's average return, not that they will suddenly drop through the floor. Sears' and Goodyear's current slides notwithstanding, there is no reason to expect the strategy of buying out-of-favor but financially sound stocks and holding them until they turn around will suddenly turn into a bad strategy. These are classic turnaround stocks. It takes a year or two for that process to play out.

Another thing to remember is that if all of the doomsayers are right and high-tech stocks are a bubble about to burst (not that I believe that for a minute, by the way), holding strong, old-line, consumer corporations is hardly a bad idea.

Finally, there is nothing in our database that indicates that the dropped stocks, as a whole, are bad investments. Most of them haven't been Foolish Four stocks or even high-yield stocks, though, so there isn't really a comparable situation. Even if there were, one or two similar occurrences wouldn't tell us much. You need a fair amount of data to establish a trend.

In a situation like this, many people expect us Fools to offer guidance. That need and desire for someone to tell us what to do when we don't know is probably the main reason why the financial advice industry thrives. We all want to turn to an expert who has the answers.

Me, too.

I may know something about our Dow database, but I don't know any more than anyone else about what to do in a situation that is not in that database. I do have a huge amount of faith in the ability of our community to work this through, though. The first question I intend to address is just how different is this Dow from the Dow of the '70s and '80s?

Tomorrow, Barbara Bayer will occupy this space, but I will be back on Monday to share what Fools are discussing on the message board and what we are finding in the database. In the meantime, relax, and don't let these changes spook you.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

10/28/99

1. Philip Morris
   (NYSE:MO)
2. * General Motors
   (NYSE:GM)
3. * Caterpillar
   (NYSE:CAT)
4. * Eastman Kodak
   (NYSE:EK)
5. * International Paper
   (NYSE:IP)
6. AT&T
   (NYSE:T)
7. Exxon
   (NYSE:XON)
8. DuPont
   (NYSE:DD)
9. JP Morgan
   (NYSE:JPM)
10. SBC Ccommunications
   (NYSE:SBC)

NOTE: Today's Foolish Four stock selections are marked with an asterisk.

Foolish Four Portfolio

10/28/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC-5/8$54.75
IPINTL PAPER-3/8$48.44
JPMMORGAN (JP)9/16$132.06
MMMMINNESOTA MIN'G/MFG-11/16$96.88

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -.02% 2.21% 4.03% 24.25% 26.10% 31.54%
S&P 500(DA) 3.53% 3.13% 4.66% 9.79% 9.85% 11.75%
NASDAQ 2.59% 2.08% 4.70% 31.13% 32.34% 39.27%
DJIA (DA) 2.19% 1.45% 2.76% 17.09% 17.26% 20.70%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9814MMM73.571$96.8831.67%
12/24/9824CAT43.083$54.7527.08%
12/24/989JPM105.514$132.0625.16%
12/24/9822IP43.551$48.4411.22%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9814MMM$1,030.00$1,356.25$326.25
12/24/9824CAT$1,034.00$1,314.00$280.00
12/24/989JPM$949.63$1,188.56$238.94
12/24/9822IP$958.12$1,065.63$107.50
  Cash: $119.51  
  Total: $5,043.95  

Key
• 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.

Note
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.