Fools' First Loves: The Foolish Four

I hate admitting this, especially on Valentine's Day: In early 2000, my wife began an affair that would last more than two years. By the end, we had both paid a heavy price.

Not that kind of affair
I had decided to try stocking my wife's portfolio with the Foolish Four, the mechanical investing strategy popularized in The Motley Fool Investment Guide. Here's how it's described in the latest edition of the book:

"You start with the 30 stocks that make up the Dow Jones Industrial Average. This acts as a prescreen to ensure that you are selecting from successful, large-cap U.S. stocks. Then you screen those 30 stocks for the 10 with the highest dividend yield. (Yield equals dividend per share divided by price per share.) You then buy the five lowest-priced stocks of the high-yield 10 and hold them for one year. At that point, you recalculate the list, then make any necessary changes. And so forth. The original Foolish Four (a.k.a. Foolish 4.0) modified the Beating the Dow list by dropping the lowest-priced stock and doubling the investment in the second-lowest-priced stock."

How do these backtests look on me?
Looking back on it, it's easy to see why I walked away. I was inexperienced, and my wife's portfolio needed guidance. She needed someone with a track record, someone with authority, someone like ... David and Tom Gardner.

Their research had shown the Foolish Four beating the market as far back as 1961. (The Dec. 1, 1998, report at Fool.com pegged the total at more than 23% annually. That was more than 10 percentage points better than the S&P 500 over the same period. I mean, wow.)

But I blew it. Shortly after adding Caterpillar (NYSE: CAT  ) , Eastman Kodak (NYSE: EK  ) , International Paper (NYSE: IP  ) , and SBC Communications (now AT&T (NYSE: T  ) ) to my wife's portfolio that February, I began tinkering with the strategy, an absolute no-no in mechanical investing. Idiot.

How could you do this to me?
In May, for example, I added shares of the same four companies. Then, in December 2001, I sold her position in Eastman Kodak and bought JPMorganChase (NYSE: JPM  ) . Not surprisingly, the total cash return was -3.8% at that point.

It never improved. In fact, it got a lot worse. Finally, after a -21.8% cash return, I abandoned the strategy in July 2002, near market lows. Remarkably, my wife still managed to beat both the Dow (down 24.9%) and the S&P (down 40.8%) over the same period. That's all the more amazing because I had made a crucial mistake: I never reinvested dividends. Again, idiot.

According to the historical prices tool at Yahoo! Finance, if we had simply bought and held our original four positions, and reinvested the dividends, my wife's portfolio would be up -- wait for it -- more than 52% today. That's a compound annual growth rate of 7.2% over a period in which the Dow has been flat. Sigh.

Welcome back, honey
Now, here's the good news: My wife is back. She trusts me again. And her portfolio is doing just fine. I have dividends to thank for that. Take Sleep Country Canada (OTC BB: SLPCF), for example. This Canadian income trust, set up by mattress retailer Sleep Country, has returned 26.8% in the past eight months, thanks partly to 3.5% in monthly dividends (after accounting for foreign tax paid).

Naturally, I'm on the hunt for the next Sleep Country. If you are, too, might I suggest you consider taking a free 30-day test drive of Motley Fool Income Investor? Chief analyst Mathew Emmert recently provided comprehensive coverage of Canadian income trusts at Fool.com and devotes a large section of every issue to similar investments, such as real estate investment trusts (REITs) and master limited partnerships. All told, his approach is beating the market by nearly 4% as I write and is, of course, posting some nice yields to boot.

A Foolish finale
The Foolish Four is no more. (Find out why here.) So, too, is my ignorance. Good riddance, I say. As we celebrate this Valentine's Day, I won't remember the stocks that hated me, nor the ego that betrayed me, but instead the dividends I so badly mistreated in my wife's portfolio.

The test of time will reveal the veracity, or lack thereof, of the Foolish Four philosophy. In the meantime, I'll endeavor to invest only in stocks I understand and apply that knowledge in the proper context. That means I won't blow it again, honey. I promise. Oh, and here's a box of chocolates. Feel better?

Take a look at the rest of today's package:

Fool contributorTim Beyersreally did give his wife a box of chocolates for Valentine's Day. And some other stuff, too. Tim beneficially owns shares of Sleep Country Canada. You can find out what else is in his portfolio by checking Tim's Foolprofile. JPMorgan Chase is an Income Investor pick. The Motley Fool has an ironcladdisclosure policy.


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