FOOLISH FOUR PORTFOLIO
Why Include the Foolish 4 Port?

The Foolish Four will be included in the Workshop Portfolio, which starts in early January. It is being included as a value strategy to balance the new high growth and momentum strategies and because value stocks usually do very well during market recoveries. Now, we just have to get to the recovery.

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By Ann Coleman (TMF AnnC)
December 22, 2000

Mechanical strategies pick stocks automatically and unemotionally, but investors pick the mechanical strategies. I have picked the Foolish Four as one component strategy in next year's Workshop Portfolio, and that is causing some consternation.

Consternation is understandable. We just announced that we are no longer advocating use of the Foolish Four and that our original assumptions about how the Foolish Four might perform were wrong. So why aren't we just shooting it and putting it out of its misery?

Good question. That would certainly be the easy course. I've written enough about the Foolish Four to last me forever! And explaining my decision in detail requires getting into subtleties which I know darn well are usually ignored. But I'll try.

First subtlety. The Motley Fool isn't turning away from the Foolish Four 180 degrees. We haven't found anything that shows it is a bad strategy, although it can certainly be more volatile than the market. What we are doing is backing off from the idea that it is a good strategy for beginning investors or that it has the potential to provide long- term returns well in excess of the market.

The worst interpretation of the results we've found is that the Foolish Four would be likely to match the market over a long period of time while showing greater volatility. The best is that it might outperform by a few percentage points, again over a long time period and with greater volatility.

Second subtlety: My reasons for keeping the Foolish Four alive for another year are not based on statistics. Some of the reasons are emotional. (If nothing else that should serve as a big red flag to anyone who thinks they should mimic our new portfolio.) So without statistics to back up the Foolish Four, what do we have left? History. Logic. And, OK, some residual affection for an idea that got me this great job and a stubborn determination not to dump it when it's down. No logic there!

I've spent a lot of time studying the performance history of Foolish Four portfolios -- the ones started every January, anyway -- and one thing struck me several years ago: the strategy did really well during recovery years. Originally, I was looking for support for the often-mentioned idea that it should hold up well when the broader market was down. I didn't find that. Except for the recession years of 1973-74 when the January portfolios beat the market by astounding margins, performance during the rest of the bad years appeared quite inconsistent. But the next year.... Ah, the year after a bad year looked pretty darn good.

It looks to me like the idea that conservative value stocks are the ones that lead a market recovery is borne out by the Foolish Four's history. Of course, the market isn't recovering yet, and for all I know the worst is yet to come, but when it does recover, I think that downtrodden value stocks are a good place to be.

The Workshop portfolio is heavily weighted toward growth and momentum strategies. We have one value strategy, Low Price/Book Value, but without the Foolish Four, LowPB would be just 20% of the portfolio. With the Foolish Four in the mix, the portfolio will be invested one-third in value stocks and two-thirds in growth/momentum stocks. That feels about right for my personal risk tolerance and investing style. I'm comfortable with that blend.

A lot of compromises have been made in designing this portfolio as a teaching tool. If it were just a matter of privately managing my own money, I would drop one or two strategies and put more cash into each stock to keep the percentage I spend on trading costs low. I'd trade on Friday afternoon the minute the rankings came out, and I would not start all of the portfolios on the same day. But those are minor considerations. One thing I can't compromise on is risk tolerance and personal comfort level. I'm more comfortable with the Foolish Four there to balance the more aggressive Workshop strategies.

Even though current performance has nothing to do with my comfort level, I just have to mention that as of yesterday, the Foolish Four's return for the last two years was double the return of the S&P 500 over the same period, and it is beating the Nasdaq!

Yep, one could truthfully say that our Foolish Four portfolio is doubling the market. That would be lying by omission, however. The returns for the Dow are almost twice that of the Foolish Four. That tells us that we would likely have been better off drawing four Dow stocks from a hat when we picked our last two sets of Foolish Four stocks!

I hope everyone has a very happy holiday of their choice. Next week we will finalize our plans for the new Workshop Portfolio.

Fool on and prosper!

Read More Foolish Four Reports


Top Dow Stocks
( RP Order )

12/22/00

1. Philip Morris
   (NYSE:MO)
2. * Eastman Kodak
   (NYSE:EK)
3. * General Motors
   (NYSE:GM)
4. * Caterpillar
   (NYSE:CAT)
5. * DuPont
   (NYSE:DD)
6. Int'l Paper
   (NYSE:IP)
7. SBC Comm.
   (NYSE:SBC)
8. Alcoa
   (NYSE:AA)
9. Honeywell
   (NYSE:HON)
10. Procter & Gamble
   (NYSE:PG)

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

Foolish Four Portfolio


12/22/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
CATCATERPILLAR INC1.884.19%46.63
EKEASTMAN KODAK0.190.48%38.88
GMGENERAL MOTORS(1.31)(2.55%)50.06
JPMMORGAN (JP)0.500.30%167.88

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Annualized
Foolish Four0.67%4.72%11.68%(10.73%)9.58%4.68%
S&P 500 (DA)2.43%(0.47%)(0.68%)(11.06%)6.88%3.39%
NASDAQ7.56%(5.14%)(3.11%)(38.15%)15.86%7.64%
DJIA (DA)1.39%1.89%2.09%(7.39%)17.40%8.36%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
12/24/989JPM105.51167.8859.10%
12/24/9824CAT43.0846.638.22%
12/27/9918GM73.2650.06(31.66%)
12/27/9920EK65.0938.88(40.27%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
12/24/989JPM$949.62$1,510.88$561.25
12/24/9824CAT$1,034.00$1,119.00$85.00
12/27/9918GM$1,318.62$901.13($417.50)
12/27/9920EK$1,301.75$777.50($524.25)
 
Cash: 
Total: 
$132.58
$4,441.08
 

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.