FOOLISH FOUR PORTFOLIO
An F4 FAQ
All questions answered for a fee

By Ann Coleman (TMF AnnC)

TAMPA, FL (December 21, 1999) -- The sun is shining like only a Florida sun can in December, low (for this latitude) and golden and warm. The kids are splashing in the Gulf of Mexico and getting sand in their hair that will take three shampooings to get out, and I'm stuck 20 miles inland with a laptop and strep throat and a column to write.

Feeling sorry for me yet?

Don't bother. Tomorrow it's supposed to snow in Virginia, and I will still be stuck down here with the poinsettias as high as the eaves, the green oak trees, and the carolers in Girl Scout shorts. Not that I'm complaining. The contrast is delightful and the family get together is far more important than matching some cultural Christmas archetype. But still, there's something about a white Christmas....

Meanwhile, back at the ranch house, let's try to run through some of the more frequently asked questions that have been appearing in my mail box lately.

What do I do about Sears and/or Goodyear?

This is one of those questions with at least two very definite but contradictory answers.

If you are renewing your entire portfolio now and your intention is to follow the strategy exactly, then you would sell it (them) and reinvest the money in next year's stocks when you do your normal renewal. That's not because they aren't good turnaround possibilities, but simply because they aren't part of the Dow anymore so they won't be "on the list."

If you bought sometime after the start of the year last year and your intention was to follow the "start any time but hold until the end of the NEXT year" plan, then you simply hang on to Sears (NYSE: S) and Goodyear Tire (NYSE: GT) until December of 2000.

Apparently it bothers some people to sell S and GT when they are down, especially since they would almost certainly be on the Foolish Four list today if the Dow hadn't thrown them out. I am very sympathetic to that argument and certainly don't object to anyone who wants to hold them for that reason. It's not my recommendation, though, because I base my recommendations on the past history of the strategy. We simply don't have enough similar instances from which to draw conclusions. Those return numbers we so often quote come from a strategy where a stock that was removed from the Dow was always replaced on the portfolio renewal date. That's all we know.

However, the stocks that have been removed from the Dow in the past suffered no particular ill effects (although some were already in big trouble). It's not a death knell or even a wake-up call, in most cases, and I see no reason for Sears and Goodyear not to go through the same (probable) recovery cycle off the Dow that they would follow if they were on it.

I want to duplicate your portfolio but I will be skiing in the Alps. Can I get the stocks a day early?

I love it when people ask me for the Foolish Four picks in advance. Last year I was offering to sell them for some cash under the table, but no one took me up on it. Maybe that's because I told them, in the nicest way possible, that if they were asking that question, they weren't ready to invest any real money anyway. First, start with the Foolish Four Explained, I would say.

For the record, whenever you are ready to invest, the Foolish Four for you will be those stocks over there on the right. If you want a more up-to-the minute list or you want to see all the underlying numbers, you can use the Today's Stock Lists link, also on the right. You should also understand that the stocks we pick for our portfolio are at least partly a function of the day we chose to invest. If you decide to invest on December 31, you don't want to buy our stocks, you want to buy the ones on the December 31 list. They will be similar, sometimes even the same, but the idea is to buy the stocks when their prices are relatively lower.

As Sears and Goodyear buyers know, that doesn't guarantee that you will be buying the stocks at their low, but it does usually give you a relatively good buy-in point.

Do you really think this strategy is still working?

That's a very good question. Until Caterpillar (NYSE: CAT) collapsed, we were comfortably ahead of the Dow for the year, and I thought we might be returning to a kind of "normal" after several years of underperformance. Now it doesn't look like that, although obviously one year and one stock are not determining factors for this kind of strategy. (Think Long Term!!!)

But I do think that it's quite possible that the strategy isn't working as well as it did in the '70s and '80s for two reasons. One, it's a "value" strategy, i.e., it's based on buying stocks that are priced low relative to their intrinsic value. The bull market of the '90s has all been based on "growth" stocks, stocks whose price is based on their potential for rapid growth. These are two fundamentally different kinds of investing and there isn't much doubt that growth investors have fared better in recent years.

The markets undergo regular shifts from value investing to growth investing. A lot of experienced growth investors are keeping some cash in the Foolish Four as a hedge against that kind of shift. When it happens it isn't pretty. If this is the case, then a good long term attitude is all that we need. But....

The other reason why the strategy may be underperforming the market lately is of more concern to me. It's the idea that the Dow has been shifting its emphasis on substantial dividends as a criteria for inclusion. If the editors of The Wall Street Journal, the people who select the Dow stocks, have been using different criteria to define a Dow stock (which is probably a good idea if they want their index to reflect a market that increasingly disdains dividends), then the pool of high-yielding stocks from which our Foolish Four stocks are selected is shrinking and that would naturally lead to lower returns.

That is something we can do something about, though. See Is Something Wrong With the Foolish Four? and Heresy for a more thorough discussion of this topic.

Other frequently asked questions, with links to answers, have been:

When is the best time to start? 03/31/99: When to begin and 09/04/98: Fun with Statistics

Wondering about the changes in the Foolish Four and why it doesn't match the books? The Foolish Four Evolves

Want to know how to avoid investing in Philip Morris or other socially controversial companies? Or just wondering if you should drop XYZ because it looks like a sure loser? 10/21/98: Messin' With the System

Want to get started but not sure how, or even if it's feasible? 9/21/98: Let's Talk Money, Pt. 1

Things not going as well as you expected? 10/09/98: It's Not Working!

If you're planning to do the Foolish Four switch with us on Thursday, please make sure you've "done your homework." Then you will be ready to take the plunge.

Fool on and prosper!

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

12/21/99

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

12/21/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CATCATERPILLAR INC-3/4$44.38
IPINTL PAPER1/4$53.31
JPMMORGAN (JP)19/32$128.38
MMMMINNESOTA MIN'G/MFG-1 7/16$92.00

  Day Week Month Year
To Date
Since
12/24/98
Annualized
Foolish Four -.38% -1.22% -2.11% 18.26% 20.02% 20.15%
S&P 500(DA) 1.08% .87% 3.19% 17.19% 17.26% 17.37%
NASDAQ 3.36% 4.21% 17.24% 78.37% 80.03% 80.68%
DJIA (DA) .50% -.51% 2.97% 23.39% 23.54% 23.70%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
12/24/9814MMM73.571$92.0025.05%
12/24/9822IP43.551$53.3122.41%
12/24/989JPM105.514$128.3821.67%
12/24/9824CAT43.083$44.383.00%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
12/24/9814MMM$1,030.00$1,288.00$258.00
12/24/9822IP$958.12$1,172.88$214.75
12/24/989JPM$949.63$1,155.38$205.75
12/24/9824CAT$1,034.00$1,065.00$31.00
  Cash: $119.51  
  Total: $4,800.76  

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.