By Todd Beaird (TMF Synchronicity) (synchronicity)

DES PLAINES, IL (Jan. 27, 2000) -- Of all the questions people have about the Foolish Workshop screens, the big question is "will they continue to work?" This simple question really has two parts. They are:

A) Is the past outperformance of the screens simply a fluke?

B) Have there been significant changes in the market that render these screens obsolete?

Before addressing these questions, a quick note. It is important to realize that the returns we give for all screens are simply their past performance since 1986. Occasionally we say (for example) that the annual return for Spark5 is 22%. To be precise, we should say that Spark5 has returned 22% annually over the backtest period. That's an important distinction.

The first question is essentially "was the past performance of the screens due mainly to luck?" There are various ways to address the question mathematically. Essentially, we would look at the returns of our screens compared to the overall market. Then we look at the variation in those returns (does that 30% CAGR screen have returns between 20-40%, or 0-60%?). One can then perform statistical tests to determine the likelihood that those superior results resulted from chance. This process was described in great detail in a series of articles starting last September. In addition, Mindseye's backposts include a list of posts devoted primarily to statistics.

Thanks to Kuperman, "out-of-sample" data (that is, data that wasn't used in originally developing the screens) is being analyzed as you read this. The collection and analysis of that data was a long, arduous process, but it was done thanks to an amazing effort by a number of Workshop contributors. Once the full information is posted in the Foolish Workshop message board (this will probably occur in early February), you can rest assured that all of us will be putting it through the statistical meat grinder. Be sure to stop by soon to check out the results, or contribute your own statistical expertise!

The second question is much more subjective. Have the markets changed so much that our screens will not work going forward? Discount brokerages were essentially nonexistent 10 years ago, and the Internet was unknown to the masses. With so much information now available to everyone, can our straightforward screens still work in this new era?

One screen that many people are asking about is the granddaddy of them all, the Foolish Four. Although this screen has a very long and impressive history, many people question its effectiveness in an era when dividend payments are shrinking. How relevant is data from 1960 to our new economy of the 2000s? Many would argue that the development of the Internet represents a "paradigm shift" in our economy, one that renders the old rules obsolete (in fact, I believe this argument has been made more than once at the Rule-Breaker portfolio).

My view, for what it's worth, is "plus ca change, plus ca meme chose." The Internet is a truly revolutionary technology that will change, (heck, is changing) our lives in a dramatic fashion. However, it is hardly the first significant technological innovation to come along. Looking at communications alone, the last 150 years have seen the development of the telegraph, radio, telephone, and TV. If you want to go back even farther, consider the development of the printing press. Each of these have had substantial changes on our society and our lives. Each was revolutionary in its time, but now we take many of them for granted. It is our nature to overestimate the impact of present events, while we quickly forget about the impact of past events. Everything looks bigger when it's close to us and smaller when it's far away, either in distance or time.

In the end, markets are made up of people, and we have changed little over the years. The driving factors that have influenced all markets over time are predominantly human greed and fear. Our screens, which force us to be disciplined and take a long-term view, have a good chance of working through many different conditions. Sure, we've made wondrous tools that have transformed our surroundings, but our basic emotions remain the same. As the late Dan Quisenberry (a superb reliever for the Kansas City Royals) once said: "I've seen the future. It's a lot like the present, only longer."

Does this mean that our screens are guaranteed to continue working? No, of course not. Those technological changes may influence the markets in a way that renders one or more of our screens invalid. But I wouldn't be in a hurry to declare any screen dead or dying. (And for those of you who are wondering, dividend yields have been strongly related to inflation over the last 50 years. If inflation were to raise its ugly head again, you might see dividend payment take on new life!)

Some things are truly timeless. If you need a reminder, just think of any long journey. From the time our ancestors traveled on foot across the plains, to today's trips on supersonic flights, there has always been a child asking, "Are we there yet?"

Until next time, Fool On!