FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
The Dow, It Is A-Changin'

By Barbara Eisner Bayer (TMF Venus)

HILLSBORO BEACH, FL (Nov. 9, 1999) -- Adjusting to the recent changes in the Dow is generating a Pandora's Box of questions about the efficacy of the Foolish Four process. After 103 years of blue-chip bliss, the Dow apparently needed to shake things up in order to enter the 21st century, more accurately reflecting a varied marketplace.

As the old saying goes, there are two things one can count on: death and taxes. The Buddha added a third: change. We've adapted to the first two; the third still confounds us.

People create their lives, homes, jobs, and investing techniques in ways that please them, hoping to keep the chameleon of change at bay. Much time and effort is devoted to creating environments, both financial and emotional, that are as comfortable as warm slippers. To suddenly wake up one day and find your well-structured investing philosophy in volcanic eruption can be very, very scary. Imagine spending a lifetime being drenched in the mellifluous and consistent tones of Ella Fitzgerald, only to wake up one day and find Madonna -- that multinational corporation who reinvents her style each quarter -- permanently monopolizing the airwaves. Fear is inevitable.

Inventor Charles Kettering said, "The world hates change; yet it is the only thing that has brought progress." And surely there has been progress since the Dow Jones Industrial Average was originally created on May 26, 1896. Of the 12 companies that originally comprised the Dow, only one, General Electric (NYSE: GE), still remains. And even GE was kicked off the Dow in 1898, only to return nine years later and claim a permanent parking spot. Well, permanent, thus far.

The most constant period of the Dow was during and after World War II (1939-1956), where no changes were made in its makeup even though there were rapid changes in the economy. Guess everyone was too busy fighting the war, then producing those baby boomers.

While the Dow has increased the frequency of its changes in recent years, it's a mere reflection of the increased pace of the times. With information transmitted over the Internet faster than even Superman could deliver it, and cellular phones enabling anyone to be reached anywhere, industry has to move quickly to keep up. If the Dow expects to remain a "biography of American business" (as confessed in the Dow Diaries), it's likely that there will be frequent changes in its composition over the next quarter century.

The best way to deal with change is to be flexible, since anxiety and tension only create more problems. If you want to float in the water, you need to relax your muscles in order to sustain the buoyancy necessary to avoid drowning. Ditto if you want to float with the Foolish Four.

Keep this in mind when it comes to reworking and questioning investing models like the Foolish Four, where it takes substantial time, effort, and devotion to develop new methods or to generate new types of data that will reaffirm the previous methodology. We Fools have the good fortune of having a community to unite with while we look for answers, and to help us adhere to the choices we've already made.

Ann Coleman and the Fools on our message board are investigating and testing the effects of the changes on the Foolish Four. Until the results are in, there's no need to do anything other than invest as usual.

Last week, Ann wrote, "It looks to me like the biggest danger from this change in the Dow's composition is that it might make the Dow harder to beat." And, "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."

So the worst-case scenario at the moment is that a Foolish Four portfolio may perform closer to the Dow average rather than beat it significantly -- which is still good investing, especially if you only want to do it for 15 minutes a year.

Speaking of change, it's inevitable that the Justice Department's findings of a Microsoft monopoly will ultimately have some effect on the way Microsoft does business. Any changes in Microsoft will have an effect on the DJIA. But who knows what those changes will be? My favorite speculation comes from JayCeeR, who considers a possible divestiture analogous to AT&T's in 1984, as he looks forward to a world blessed with "Baby Bills."

As you try to understand why things keep changing, consider the words of Jonathan Swift: "There is nothing in this world constant but inconstancy."

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

11/9/99

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

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

Foolish Four Portfolio

11/9/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC-3/16$53.88
IPINTL PAPER5/16$54.06
JPMMORGAN (JP)-2$134.75
MMMMINNESOTA MIN'G/MFG-15/16$94.06

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -.13% -1.25% .35% 26.41% 28.29% 32.77%
S&P 500(DA) -.85% -.36% .17% 11.65% 11.71% 13.43%
NASDAQ -.60% .73% 5.35% 42.52% 43.84% 51.24%
DJIA (DA) -.95% -.81% -1.05% 17.03% 17.20% 19.79%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9814MMM73.571$94.0627.85%
12/24/989JPM105.514$134.7527.71%
12/24/9824CAT43.083$53.8825.05%
12/24/9822IP43.551$54.0624.14%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9814MMM$1,030.00$1,316.88$286.88
12/24/989JPM$949.63$1,212.75$263.13
12/24/9824CAT$1,034.00$1,293.00$259.00
12/24/9822IP$958.12$1,189.38$231.25
  Cash: $119.51  
  Total: $5,131.51  

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.