<THE FOOLISH FOUR>

Variations on a Theme
by Ann Coleman
(TMF AnnC)

Alexandria, VA. (Sept. 18, 1998) -- As many of you know, the Foolish Four was the product of an ongoing collaborative effort by both staff and readers on our Dow Dividend Approach/Foolish Four message board. Those indefatigable Fools have explored hundreds of ways to select outperforming stock portfolios from the 30-stock Dow universe. The amazing thing is that literally dozens of them have "Beaten the Dow" and beaten the High Yield 10 and the Standard & Poor's 500 Index.

One variation on the Foolish Four has performed so well that we have added it to the strategies we follow here in the Foolish Four area.

Developed independently by both Elan Caspi and Bob Price, the RP variation (RP = Ratio Procedure) is a bit more complicated to use than the Foolish Four, but it has a number of advantages. Robert explored some of them last winter in The RP Variation.

First, let's look at the disadvantages, though. The Foolish Four formula requires nothing more than a newspaper, a pen, some scratch paper and the ability to tell if one number is larger than another. The RP variation requires actual math skills. OK, that's not a huge disadvantage, particularly when we provide the current RP order every day on our Current Dow Order page. But the spirit of Foolishness says: "Do thine own homework," so we really advise anyone who is considering using the RP variation to understand how the formula works and be able to use it, even if you decide to use our list.

Here's the formula:

1. For all 30 Dow stocks, square the dividend yield and divide by the price.

 
   Yield x Yield 
  --------------- = RP Score 
    Price

2. Rank each stock by the RP score in descending order (highest first).

3. Drop the top ranked score (highest RP value) and buy the next four in equal dollar amounts. (Buy in December or on January 2 and hold for at least one year. Why? See When and How Long. The RP variation showed the same pattern of returns.)

The RP variation has rolled up some impressive historical performance numbers. Over the past 25 years, the RP has returned an average 24.66% per year. If we add it to our total return table from Wednesday, you get this:

 
 S&P Index Fund:    $215,208.12 
 High Yield 10:     $585,606.67 
 Foolish Four:    $1,425,651.37 
 RP Variation:    $2,471,426.87 
 

That's the value at the end of 1997 of hypothetical portfolios begun 25 years ago with an initial deposit of $10,000 and with no money added since (dividends reinvested, of course).

Another impressive thing about the RP variation is that those higher returns are actually more consistent than the Foolish Four's returns. The RP's standard deviation (explained in last Wednesday's report) is actually a bit lower than the Foolish Four's.

Here's how the two strategies have performed over the past 10 years:

 
           Foolish 4    RP Variation 
 1988      13.62%       22.08% 
 1989      15.28%       47.45% 
 1990     -17.61%      -17.61% 
 1991      81.61%       34.81% 
 1992      29.94%       29.94% 
 1993      26.22%       30.26% 
 1994       4.72%        7.60% 
 1995      30.58%       47.05% 
 1996      24.34%       26.56% 
 1997      22.31%       19.49% 
 

Note: As you would expect, there is some overlap in the stocks identified by the two methods. In fact, in 1990 and 1992, both strategies identified the same four stocks, hence the identical returns.

Who is the RP variation best for? You still need a good Insomnia Index Quotient to follow this strategy (see 1990 and 1994 above), but if you understand the numbers and feel comfortable with a more complex formula that might not provide quite the thrills of the Foolish Four (see 1991), the RP variation may provide rich rewards.

Correction to Wednesday's Report: I wrote, "Over the past 25 years, the S&P has returned 13.32% while the HY10 has averaged annual returns of 17.47%, compared to the Foolish Four's 21.97%." Those returns were actually 27 year returns. The 25 year returns are: S&P, 13.06%; High Yield 10, 17.68%; Foolish Four, 21.94%.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/18/98 Close

Stock Change Last -------------------- UK - 1/8 37.31 IP - 1/16 43.56 MO +1 5/8 46.25 EK + 13/16 85.00

Day Month Year FOOL-4 +1.04% 7.55% 8.95% DJIA +0.28% 4.73% -0.16% S&P 500 +0.12% 6.53% 5.12% NASDAQ +1.06% 10.98% 5.95% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 85.00 40.35% 12/31/97 276 Philip Mor 45.25 46.25 2.21% 12/31/97 289 Int'l Pape 43.13 43.56 1.01% 12/31/97 291 Union Carb 42.94 37.31 -13.10% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 17510.00 $5034.13 12/31/97 276 Philip Mor 12489.00 12765.00 $276.00 12/31/97 289 Int'l Pape 12463.13 12589.56 $126.44 12/31/97 291 Union Carb 12494.81 10857.94 -$1636.88 CASH $754.73 TOTAL $54477.23

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