Hi,

I have a question about the Foolish Four approach - I was reading recently in Investopedia that you recommend in your approach to put down 40% for the 1st stock of the final four (once I've narrowed it down to four)and then 20% to the final three...is that correct? In your workbook it seems like the approach is to put equal amounts down for each of the final four on your list? Which is it?

Thanks for any help,
Brenna - brenjg | Date: 10/9/2012 1:22:38 PM | Number: 259505

The "Foolish Four" investment approach, actually more accurately called The Dogs of the DOW(Industrial's) is just another example of how old and out-of-date the Motley Fool Investment Guide by the brothers Gardner has become. The "Dogs of the Dow" at one time used to be an effective year-end investment strategy, that actually has not worked very well for well over a decade or more. Like nearly all "Old-time" Mechanical Investment "Rules" once they become widely know and more importantly followed and exploited the superior performance of the Rule ceases to exist. There are even several Mutual Funds that try to employ the "Dogs of the Dow" technique.

Other "Old Market Saws" such as Sell in May and go away until September become too widely followed and hence cease to be valid and effective investment rules. One that still sometimes has a small effect is to sell semiconductor and electronic component stocks in April and May, buy them back, hopefully at lower prices in late August to early September still has a small positive return component left to it.

The rational for the semiconductor and electronic stocks Rule is that much of Europe goes on Holiday during July and August returning to work in September. While on Holiday, electronic component demand declines sharply in Europe during the Summer months. While this is still true to some extent, very little electronic component demand still originates in Europe. Most of that manufacturing has moved to Asia and even some to South and Central America. When markets adjust to old rules, those old rules have lost their profit potential.

Markets while not perfectly Efficient, the Markets do adjust their behavior to perceived patterns by competing simplistic Rule based excess returns investing. If Investing were only that simple, we would all be Rich and comfortably Retired early.

Kahuna, CFA
Investment Professional
1974-Present

Disclosure: Retired for a time from 1995-2011, initially at age fifty. Un-retired in 2012 to start an Institutional Only Venture Capital Limited Investment Partnership 2012 - 2019. Last VC Portfolio returned an annualized compound rate of return of 58.4%, 1992-1995 inclusive.