FOOLISH FOUR PORTFOLIO
Why You Shouldn't Invest
In the Foolish Four

By Ann Coleman (TMF AnnC)

RESTON, VA (Dec. 16, 1999) -- About this time last year I wrote a list of the Top Ten Reasons NOT to Invest in the Foolish Four. I just reread it and was very tempted to take the day off and just repeat that column, because not that much has changed. As someone who is way behind in her Christmas shopping, I really need the day off, but, alas, I just can't quite convince my conscience.

And, besides, a few things have changed. For one, reason number two was simply "International Paper" (NYSE: IP), which had been a loser for several years in row. As has happened so many times before, the laggard finally got moving and this year IP is beating the Dow. In fact, it's our second-best performer.

Another reason not to invest in the Foolish Four was fear that the strategy might not work any longer. Last year I dismissed that fear, but this year, due to the changes in the Dow that appear to be part of a trend toward selecting companies that pay insignificant dividends, I'm not so sure. That's right -- I'm not sure. I know that is an unsettling thing to admit, but hey, reality is often unsettling.

The cornerstone of the Foolish Four is its history. If the circumstances that were in effect when that history was taking place (like a Dow full of high-dividend-paying stocks) are no longer true, then the hopeful assumption that the future will repeat the past is no longer justified. Unfortunately, this is not something that can be easily tested, but we are attempting to acquire the data to test it and to test a strategy that is not limited to the Dow.

Until the testing is complete -- and it will take months -- what does one do?

I am going to continue to follow the strategy because I think the worst-case scenario is that it will generate returns more like the High Yield 10, AKA the Dogs of the Dow. The Dogs of the Dow beats the Dow but only by a few percentage points. There is no reason to suppose that buying out-of-favor blue-chip stocks and holding them for a year or two while they turn around is a bad idea. My concern is that with fewer Dow companies paying significant dividends, the pool from which those out-of-favor stocks are selected may be too small for optimal performance.

And what is the right-sized pool anyway? People have focused on the Dow because it provided a handy list of blue-chip companies, but we may find that choosing from a pool of 50 or 100 blue-chip stocks provides far better returns. That's one thing we will be testing.

But back to reasons why you shouldn't invest. This year I would have to say that the best reason not to invest in the Foolish Four is unrealistic expectations. If you expect the stocks you buy to turn around quickly, you may not be very happy with your experience. The process takes one to two years on average, and three years is not unusual. Check out the Foolish Four History to see what I mean. In the meantime, especially in the early months, they go up, they go down, they sit still. Eventually most of them come 'round, but if you are going to spend the next year second guessing your decision whenever they aren't up, then you won't be a very happy Foolish Four investor.

Another good reason might be your personality. Are you a type T? Type T's are thrill seekers. Look down any list of Amazon.com (Nasdaq: AMZN) investors and you will find a fair sprinkling of T's. Here's why. The chart behind that link shows Amazon going through three cycles of doubling and being cut in half in just one year. Thrills galore, but the kind that many Foolish Four investors would probably be willing to skip. If you invest for the adrenaline rush, you would certainly be unhappy with our plodding blue chips, but you might find a core of Foolish Four stocks very comforting next time the cycle turns down.

It has to be (pick one) annoying, scary, envy-generating, or disgusting to read the stories of overnight Internet billionaires and their mail-room millionaires that are all over the press these days. I go through most of those emotions myself. And then there are the day traders and venture capitalists and just plain lucky investors (like the ones who bought Amazon three years ago). Some days it seems like everyone's getting rich but me.

Then I remember the last time I tried to pick a hot stock and it went down 67% in three weeks. And I take another look at the Foolish Four's Cumulative Returns history, and (cue Julie Andrews) then I don't feeeeel so bad!

Fool on and prosper!

Here's a way to feeeeel good: Contribute to Foolanthropy!

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

12/16/99

1. Philip Morris
   (NYSE:MO)
2. * Caterpillar
   (NYSE:CAT)
3. * Eastman Kodak
   (NYSE:EK)
4. * General Motors
   (NYSE:GM)
5. * JP Morgan
   (NYSE:JPM)
6. DuPont
   (NYSE:DD)
7. SBC Comm.
   (NYSE:SBC)
8. Int'l Paper
   (NYSE:IP)
9. 3M
   (NYSE:MMM)
10. Exxon Mobil
   (NYSE:XOM)

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

Foolish Four Portfolio

12/16/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC5/8$47.13
IPINTL PAPER-3 5/16$52.50
JPMMORGAN (JP)-1 1/2$128.88
MMMMINNESOTA MIN'G/MFG-1 9/16$93.69

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -1.88% -1.74% -.55% 20.14% 21.93% 22.42%
S&P 500(DA) .39% .12% 2.14% 16.00% 16.06% 16.42%
NASDAQ 2.57% 2.62% 11.36% 69.43% 71.00% 72.87%
DJIA (DA) .17% .18% 3.37% 23.87% 24.02% 24.56%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9814MMM73.571$93.6927.34%
12/24/989JPM105.514$128.8822.14%
12/24/9822IP43.551$52.5020.55%
12/24/9824CAT43.083$47.139.38%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9814MMM$1,030.00$1,311.63$281.63
12/24/989JPM$949.63$1,159.88$210.25
12/24/9822IP$958.12$1,155.00$196.88
12/24/9824CAT$1,034.00$1,131.00$97.00
  Cash: $119.51  
  Total: $4,877.01  

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.