Of course, those that are familiar with the Foolish Four investment philosophy are actually expecting us to sell our Fool Four holdings right now, in order to rotate into a new set of Fool Four selections. Currently, we have five stocks in the Foolish Four segment of our portfolio: ExxonMobile (NYSE: XOM), General Motors (NYSE: GM), Chevron (NYSE: CHV), Eastman Kodak (NYSE: EK), and Delphi Automotive Systems (NYSE: DPH), a spin-off from GM. For some time, our plan was to sell our current Fool Four holdings this month.
Now comes the really BIG news. After significant internal discussion, we've decided that we're not going to use the proceeds from these sales to purchase another set of Fool Four stocks. Instead, we're going to take those funds as well as our January and February investment dollars and invest them in one or two new or emerging Rule Makers. We certainly haven't decided what those companies will be yet, and we invite you to make suggestions backed up with your own Foolish analysis (no ticker symbol posts, please) on our Rule Maker Companies Board. In fact, at January's end, we'll award an autographed copy of Rule Breakers, Rule Makers to whomever posts the best piece of Rule Maker analysis. In order to qualify though, you'll have to format your post so that it covers the Rule Maker Essentials or else prepare a Rule Maker Ranker spreadsheet, along with additional analysis of the company.
As one of the two portfolio managers that has been around since this portfolio started (Rob is the other), I can say that the decision to include a Fool Four component in the portfolio originally was not one that we made without some discussion. If memory serves, there were two primary reasons that this portfolio initially included a Fool Four component:
1) Tom felt very strongly that it should be included; and,
2) Unfortunately, we know that no matter how much we try to remind people that the portfolios at the Fool should not simply be mimicked, there are people out there that do just that. If that is true, then there is certainly some merit to putting some ballast in the portfolio, and that's just what the Fool Four holdings do. While Rule Maker investing is inherently much more conservative than Rule Breaker investing, owning Fool Four stocks provides something of a value component to the portfolio.
The question that I suspect many of you are asking is why are we making this change. After all, the Fool Four has outperformed the market for quite a long period of time. What I'd like to do is list some of the pros and cons of holding Foolish Four stocks, and then share our reasons for deciding to stop utilizing the strategy in the future.
Advantages of owning Fool Four Stocks in the Rule Maker Portfolio:
a. The Fool Four invests in high dividend stocks that provide a hedge in the event of down or bear markets;
b. The Fool Four is a contrarian approach to investing;
c. The historical returns of the Fool Four solidly beat the market;
d. The Fool Four provides a solid foundation to any portfolio;
e. It takes less than 30 minutes a year to manage Fool Four stocks; and
f. The more stocks that one's portfolio includes, the more time one has to spend following such stocks.
Disadvantages of owning Fool Four Stocks in the Rule Maker Portfolio
a. Higher transaction costs;
b. Less opportunity to defer income taxes; and
c. Less opportunity in this space to have meaningful discussion about such topics as how to select and analyze stocks for investment.
A first glance at the above lists could lead one to conclude that we should continue to hold our Fool Four stocks; however, we've decided to the contrary. This shouldn't, however, in any way be taken as a belief on our part that Fool Four stocks do not form a solid foundation for a portfolio. It's just that we're choosing to pursue a more aggressive strategy through 100% individual Rule Makers. Compared to the Foolish Four, it will be a strategy that offers more potential reward, along with more risk.
There have been a number of changes in this portfolio that have led us to conclude that we don't want to continue to hold the Foolish Four any longer. The primary one is that we now are adding $500 of new money to the portfolio each and every month. This allows us to dollar cost average into stocks during the year. If the price of a stock that we like falls, then we can buy more shares; if it goes up in price, then we'll buy fewer shares. We feel that our regular $500 additions to the portfolio provide us with an adequate hedge against a market downturn, meaning that we no longer need a Fool Four component to provide that benefit. The second change is that we now have five people managing this portfolio with a variety of different backgrounds. As a result, we have more knowledge to utilize in the stock selection and upkeep process.
In addition, to this Fool, the disadvantages of including a Fool Four component in this portfolio outweigh the advantages. It's my belief that the tax and transaction costs of owning Fool Four stocks are such that the best place to hold such stocks is in a non-taxable portfolio, such as an IRA. If we're successful in choosing stocks that will appreciate at a market-beating level over time, then we won't be paying capital taxes for a number of years. That means that any money we'd have to use to pay tax on Fool Four gains can instead be invested in the market. This should only serve to increase our returns. If your investment accounts include funds held in tax-deferred accounts, then holding Fool Four stocks may be a more viable part of your personal investment strategy.
An ancillary benefit of excluding the Fool Four stocks from our portfolio is that it will make it easier to gauge the performance of the "pure" Rule Maker investing approach, as once we sell our Fool Four holdings, the portfolio will only include what we believe are Rule Maker stocks.
Finally, I do think that it will be valuable for us to engage in a discussion as to what other stocks are worthy of inclusion in this portfolio. I look forward to that discussion both here and on our message boards.
If you get a few free moments, I also suggest that you read this interview with Philip Fisher author of Common Stocks & Uncommon Profits. Fisher is one of the most successful long-term buy-and-hold investors you can find. The best example of the benefits of that investing approach can be found in his answer to the question, "What's the payoff from buying and holding instead of the more conventional method of trying to buy low and sell high?" Fisher's response: "If you are in the right companies, the potential rise can be so enormous that everything else is secondary. Every $10,000 I and my clients put into Motorola (NYSE: MOT) in 1957 is now worth $1,993,846 -- after all the ups and downs of the stock market." For those that are wondering, that's an annualized return of 16% including dividends. If you're interested in Fisher-type stocks, we're now discussing them on the Grape Fisher Kings message board.
Finally, if you're near the tube tomorrow morning, be sure to tune into CNN's In the Money at 11:30 a.m. EST to see Tom and David Gardner answer questions about personal finance and investing.
Have a Foolish night.
Phil Weiss (TMFGrape on the message boards)