Fool Portfolio Report
Tuesday, August 12, 1997
by David Gardner (DavidG@fool.com)
ALEXANDRIA, VA, August 12, 1997 -- One year ago today, we purchased our Foolish Four stocks for the third consecutive time. It was Monday, August 12th, and we picked up roughly $7,200 worth of AT&T, Chevron, and 3M, and twice that amount of General Motors.
One year later, the strategy has turned in a disappointing underperformance. All three major indices (Dow, S&P 500, and Nasdaq) are up 39%-40%, with the Foolish Four showing an annual gain of 29%, ten percentage points lower. Are we complaining? Sure, why not? Of course, it's always nice to see your money rise by 29% in a year... EXCEPT when the market rose 39%.
"Hold on, there... does this mean the approach no longer works?" the skeptic asks. To which we ask back... "You give up on something when it doesn't work once?" The Dow Dividend approach and the Foolish Four strategy is time-tested and time-honored, and while we'd like them to work every single year without fail, hey, that'll never be the case. If the strategy underperforms for the next five years running, maybe we'll start looking around for something else. The Foolish Four has worked extremely well for us overall, in our Foolish history.
As for this most recent year, who's to blame? The tendency is to blame AT&T, which for so much of the year faltered in underperformance as its former telecommunications monopoly continued to evaporate and the company sought to define its present business and future prospects. But if you take a look below, you'll notice that our sights have been trained on the wrong target. Here are the performances of the individual stocks:
AT&T 26.44% Chevron 39.37% GM 17.13% 3M 43.89% Overall 28.77% Dow 40.12%
General Fraggin' Motors. Yep, you better believe it. The stock for which we plinked down almost $15,000 one year ago -- the highest-ever cost basis in the Fool Portfolio -- tossed up a mere 17% return, 23 percentage points behind the Dow Jones Industrial average.
General Motors, my friends, has been bombing.
If we made the Dow switch tomorrow (which we're not -- more on that in a minute), we would retain General Motors because it still qualifies. (You can easily find the current Dow Div list every day at our Foolish Four page in the Dow Area, which includes the extremely popular Daily Dow report written by Robert Sheard.) Another year of GM with its $2 dividend and its 3.2% yield; we could hack it. And perhaps it'll work, should the market shift temporarily away from consumer growth stocks into cyclicals.
Of course, it's been quite the opposite all year long, as GM and other Dow cyclicals have been completely bypassed by technology (Microsoft, etc.) and consumer growth companies (Coca-Cola, etc.) rising 50% or more. GM sports consensus earnings estimates of $7.63 per share this year and $7.97 per share in 1998, which may look like dull growth if this were a growth company. But as it's a cyclical, those numbers look more like a topsy-turvy company stabilizing somewhat. Should the market turn down over the next 12 months, I would count GM even more likely to be an outperformer.
As for our Foolish Four switch, we're at a crossroads due to the new tax bill's capital-gains reduction for holdings of 18 months or more. For this reason, we're going to hold off making our switch tomorrow. On an investment of $36,000, we've made a profit of $10,000 on the Foolish Four over the past year. The difference between a 20% tax rate and a 28% tax rate is thus roughly $800. You can read about these new cap-gains changes in our Tax FAQ in the Fool's school.
Our early investigation suggests that the Dow approach will perform just as strongly over 18-month periods than 12-month periods, as you can read from one of Robert Sheard's Dow reports from last week. And now you'll pay less in taxes for your profits, and because of the longer holding period you'll make fewer trades over time, meaning lower commissions.
Thus, this new change seems to be a great boon for Foolish Four investors.
Before we make any official pronouncements, however, we need to run the numbers ourselves over the past 25+ years and figure out whether the Foolish Four 18-month approach works. This will take us a few weeks, but once the work's completed we'll reveal our findings and explain any new moves we'll make.
Our default right now, though, is to expect to hold the same stable of Dow stocks for another 6 months, doing 18-month Foolish Four investing ad infinitum (or at least until the NEXT new government tax bill). That means we'll be performing our next Dow switch in the frosty winds of February, barring study results which suggest to us that Dow Div investing won't work over 18 months.
So what does that mean?
It means, for now, GO GM!
-- David Gardner, August 12, 1997
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Stock Change Bid ---------------- AOL - 3/4 67.25 T -1 9/16 40.44 ATCT - 1/16 4.81 CHV + 3/4 80.81 DJT - 1/16 9.88 GM - 1/2 60.88 INVX - 1/8 33.75 IOM + 1/8 23.56 KLAC + 9/16 61.88 LU --- 83.50 MMM - 9/16 94.50 COMS - 1/8 54.44Day Month Year History FOOL -0.26% 2.36% 18.29% 215.70% S&P: -1.12% -2.91% 25.08% 102.12% NASDAQ: -0.66% -1.10% 22.09% 118.87% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 23.56 835.02% 8/5/94 355 AmOnline 7.27 67.25 825.03% 10/1/96 42 LucentTech 47.62 83.50 75.36% 8/11/95 125 Chevron 50.28 80.81 60.71% 8/12/96 110 Minn M&M 65.68 94.50 43.89% 8/24/95 130 KLA-Tencor 44.71 61.88 38.39% 6/26/97 325 Innovex 27.71 33.75 21.80% 8/12/96 280 Gen'l Moto 51.97 60.88 17.13% 8/13/96 250 3Com Corp. 46.86 54.44 16.17% 8/12/96 130 AT&T 39.58 40.44 2.17% 4/30/97 -1170 *Trump* 8.47 9.88 -16.60% 10/22/96 600 ATC Comm. 22.94 4.81 -79.02% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 23873.75 $21291.88 5/17/95 980 Iomega Cor 2594.53 23091.25 $20496.72 8/11/95 125 Chevron 6285.61 10101.56 $3815.95 8/12/96 110 Minn M&M 7224.44 10395.00 $3170.56 8/12/96 280 Gen'l Moto 14552.49 17045.00 $2492.51 8/24/95 130 KLA-Tencor 5812.49 8043.75 $2231.26 6/26/97 325 Innovex 9005.62 10968.75 $1963.13 8/13/96 250 3Com Corp. 11714.99 13609.38 $1894.39 10/1/96 42 LucentTech 1999.88 3507.00 $1507.12 8/12/96 130 AT&T 5145.11 5256.88 $111.77 4/30/97 -1170*Trump* -9908.50 -11553.75 -$1645.25 10/22/96 600 ATC Comm. 13761.50 2887.50-$10874.00 CASH $40625.59 TOTAL $157851.65