FOOLISH FOUR PORTFOLIO

Foolish Four Portfolio
Selling Losers
Oh! The pain, the agony!

By Ann Coleman (TMF AnnC)

RESTON, VA (Nov. 12, 1999) -- Not all of my investments are in Foolish Four stocks. This is good because it constantly reinforces the value of a disciplined mechanical strategy as I grope and twist my way to a reasonable portfolio return.

But man, I hate to sell a stock that is down. I just can't stand to let go. I always think that it will come back, especially if there is no good reason for the drop. (See, I'm doing it already -- rationalizing away!)

Why can't I sell a loser? I've thought about it a lot and have come to the conclusion that it isn't my belief in the company, it isn't my belief in the long-term buy-and-hold approach, it isn't even because I am afraid it will go up after I sell it (although that seems to happen fairly often). It's because selling it at a loss means I've really lost money on that investment. It means I was WRONG. That's right, it's really about ego.

This is not good. I pride myself on being a rational person. It's not rational to hold on to a stock when you are pretty sure that it has very little possibility of going up. It's really irrational to hold when think you have better places to put your money. In fact, it's downright stupid. I do it anyway.

This is one of many reasons why I also invest in the Foolish Four and our Workshop strategies. They are unemotional, mechanical strategies that tell you when to buy and, more importantly, when to sell. Hey, they might be wrong, but at least I have the excuse that I was just following the strategy.

A fair number of Foolish Four investors are coming up against a tough call -- selling Sears (NYSE: S) and/or Goodyear Tire (NYSE: GT). As most of you know, those two companies were dropped from the Dow at the beginning of this month. Many people that bought their Foolish Four stocks early this year are still holding Sears and Goodyear, and holding them at a loss.

The dilemma is this: Now that they are no longer Dow stocks, they won't be on any new Foolish Four lists. Therefore, anyone strictly following the strategy will sell them when their renewal date comes along. BUT, if they were still on the Dow, they would be classic slow starters, stocks that one would renew for a second term, and the chances are pretty good that they will turn around sometime next year.

So if, like me, you hate to sell a stock that is down, you will be thinking: Why can't I just pretend that they are still on the Dow?

Hey, you can! With my blessing. Despite the fact that I constantly talk about following the strategy and the discipline that a mechanical strategy imposes, this IS The Motley Fool where you are in charge of your financial decisions.

Now, whether that is the "best" thing to do is a whole 'nother question. And I don't know the answer.

But here's something to think about. Which decision ultimately turns out to be the "best" decision isn't about whether Sears or Goodyear rebound next year. The real question is, What would you invest in otherwise, and how will it do? (Yes, I'm paying attention to this message, too.) In one sense, that's a useless question because we can't possibly know the answer.

But in another sense it is an excellent question, because it changes the way we think about buying and selling stocks. If you own 100 shares of Sears right now, your holding is worth almost $3,000. So let's look at it this way: Suppose, instead, you had $3,000 in cash right now. How would you feel about using the "old Dow" stocks (meaning you hold Sears) vs. switching to the new Dow?

(Ignore commissions. Commissions are so low these days that for all but the smallest portfolios, they don't even need to be considered in decisions like this. Any commission rate below $15 means that you can buy the new stock and sell the old one for less than 1% of $3000.)

What it comes down to is this: Your current ownership of Sears or Goodyear should have no bearing on your decision to own it next year.

Fool on and prosper!

Today's Stock Lists | 1999 Dow Returns

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

11/12/99

1. Philip Morris
   (NYSE:MO)
2. * General Motors
   (NYSE:GM)
3. * Eastman Kodak
   (NYSE:EK)
4. * Caterpillar
   (NYSE:CAT)
5. * DuPont
   (NYSE:DD)
6. AT&T
   (NYSE:T)
7. SBC Comm.
   (NYSE:SBC)
8. Exxon
   (NYSE:XON)
9. Int'l Paper
   (NYSE:IP)
10. JP Morgan
   (NYSE:JPM)

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

Foolish Four Portfolio

11/12/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INCUnch.$55.00
IPINTL PAPER-3/8$54.06
JPMMORGAN (JP)9/16$139.31
MMMMINNESOTA MIN'G/MFG11/16$95.69

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four 1.45% .49% 2.13% 28.65% 30.56% 35.07%
S&P 500(DA) 1.06% 1.89% 2.43% 14.15% 14.21% 16.16%
NASDAQ .75% 3.83% 8.59% 46.90% 48.27% 55.89%
DJIA (DA) 1.64% .61% .37% 18.69% 18.85% 21.49%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/989JPM105.514$139.3132.03%
12/24/9814MMM73.571$95.6930.06%
12/24/9824CAT43.083$55.0027.66%
12/24/9822IP43.551$54.0624.14%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9814MMM$1,030.00$1,339.63$309.63
12/24/989JPM$949.63$1,253.81$304.19
12/24/9824CAT$1,034.00$1,320.00$286.00
12/24/9822IP$958.12$1,189.38$231.25
  Cash: $119.51  
  Total: $5,222.33  

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.