The results are interesting enough that I thought I would share them with you. They illustrate two things: The wide variety of returns that one will get even from overlapping portfolios, and the real reason why the day you start doesn't matter -- as long as it's not the only day you start.
My modest pen pal requested anonymity, but his results are easy to verify. One portfolio was started a year ago, on October 30, 1998, with General Motors (NYSE: GM), Caterpillar (NYSE: CAT), J.P. Morgan (NYSE: JPM), and Union Carbide (NYSE: UK). Some Delphi Automotive (NYSE: DPH) shares were added from the GM spinoff on June 1. The total return from that portfolio, when rolled over last week, was 41.58% (39.6% capital appreciation and 2.98% dividends). The Dow return was 25% plus dividends during that particular period. The account was rolled over to the new Foolish Four picks (any surprise there?). He bought Kodak (NYSE: EK) and Exxon (NYSE: XON), added to GM, and is keeping GM and CAT for a second year.
Last July he reported the rollover of a portfolio started in July of 1998 consisting of GM (and DLP), CAT, International Paper (NYSE: IP), and AT&T (NYSE: T). It had returned 26%. The corresponding Dow gain was 15.08% (although that would jump about 2% if we added dividends).
Great returns, but a current portfolio of Sears (NYSE: S), JPM, CAT, and 3M (NYSE: MMM), started December 31, 1998, is up only 9.5% while one started one month later, on January 30, 1999, consisting of IP, CAT, GM (DPH), and JPM is up 24.2% so far. The December portfolio is rather sad. It's almost the same as our real-money portfolio (see Today's Numbers below) except that on that day Sears beat out IP for a spot on the list. That difference of a few days made a pretty big difference in his returns. It also illustrates just why you can't judge this strategy on the basis of a single year's returns.
In the short term, it's the luck of the draw, folks. Prices change, which causes the yields to change and both of those changes change the RP, which in turn changes the stocks that are picked on any particular day. The differences in the list aren't necessarily great from day to day, but it's a rare two-day span when the list is exactly the same from one day to the next. Our RP formula is a good enough predictor that most portfolios do just fine, but it's not perfect.
And then there are the Searses of the market. They drop in price, which gets them onto the Foolish Four list, but instead of politely turning around right away, they keep dropping, causing everyone who bought them early on to doubt the efficiency of the strategy. Well, it's not perfectly efficient. (What is?)
The point is that there is a measure of luck to one's returns in the best of circumstances. The cure for that, the way to minimize the effects of luck, is to follow the strategy consistently. That way the bad luck and the good luck will average out -- with a little luck.
That's the other thing that my friend's results illustrate. It's kind of a fast-forward version of a four-year strategy. Rather than having four successive portfolios, he has four partially overlapping portfolios with very different returns. By my back-of-the-envelope calculations, he's averaging somewhere around 25% vs. Dow returns of around 17% from July 1998 through today.
Obviously, my stay-the-course speech here needs to be modified a bit in the light of the recent discussion about the viability of the Dow as our fishing pond for Foolish Four stocks. A terrific discussion of this question is taking place on the message board, and I urge anyone interested in this question to check over there and participate. Of course, I will be reporting right here on any conclusions, and on our interim thinking, but the full debate is worthwhile reading. We never want to grow so complacent that we can't re-examine our beliefs and convictions from time to time, and when a challenge like the recent Dow changes comes along, that represents a perfect opportunity to do so.
For the record, I don't see any reason -- so far, my mind is still open -- to doubt the efficiency of the process at all. The only question in my mind is whether or not the Dow alone is the best list of dividend paying, financially stable, global mega-blue chip companies from which to make our picks. I'm still reading the board, combing through the data and even looking for additional data sources to answer this question. The answer won't be definitive any time soon, but I promise to keep you posted as we push and shove our way though the Dow-quake debris.
In the meantime, the Foolish Four stocks up there on the right look like classic beat the Dow stocks to me. The Beating the S&P strategy is an excellent alternative for anyone who is concerned about the Dow, but if I were renewing our real-money portfolio today, I wouldn't hesitate to use either set or both. Actually, if I were renewing that portfolio today, I wouldn't renew it. I would just wait until the middle of December -- not because of the changes in the Dow, but because, as we have been saying for over a year, the middle-to-end of December appears to be the optimum time for renewal based on the long-term averages for portfolios with different rollover dates.
So there's nothing much to do right now, folks. Relax and enjoy the crisp fall weather. I'll be busy enough for both of us.
Fool on and prosper!
Got a reaction to today's column? Please share it on our Dow Investing/Foolish Four message board. I will read all comments and entertain all suggestions.