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<< <<What effect will the 18 mos holding requirement have on the Foolish Four formula? Should we buy and hold for two year intervals?>>

<< ... the elves in Fooldom are madly crunching the numbers; however, we believe the 18 month holding period will probably be better....>> >>

I think that "believe" is too strong of a word. I think the most correct word would be "hope".

Jim O'shaughnessey reportedly said recently that 12 months is still better for most people, even after considering the tax issue. From what I see, we are in the mode of "listening to casual remarks emitted by self-proclaimed experts". We won't know anything for sure until after the number-crunching is done----and I want to closely examine their methods and assumption, to make sure that they did it right.

Some other thoughts (and to keep things in proper perspective):

1) I've heard that 60% of the DowDogs carry over from one year to the next.

2) By my calculations (from 1971 through 1997), 44% of the Foolish Four carried over, and 25% of the Foolish Two carried over.

Anything, of course, that carries over is long-term anyway, so extending to 18 months only converts the remaining 56% from short-term to long-term. So you don't save 8% tax on the full gain, but only on the gain attributable to the 56%. Complicated, also, by the fact that I have no idea of how the gains are distributed between the 44% and 56% of the stocks. Folks, this is NOT as straightforward as it looks on the surface!

3) Tom Kuffel's analysis showed that a two-year holding period was much inferior to a one-year period. A naive straightline drawn between these two points would indicate that 18 months is also inferior. But we have no idea (yet) on the true shape of this line, and we don't know if there is a peak around 18 months or not.

4) The Republican leadership in Congress has said that they are not done, and plan to revisit capital gains tax laws in the near future.

5) The long-term holding period in the new tax law was changed from 12 to 18 months only at the last minute, at Rubin's insistance. It appears to be totally arbitrary--and arguably has the effect of reducing tax revenues.

6) There doesn't seem to be any rational reasoning for the 18-month period--other than "evil greedy capitalists want a short period, so we'll make it long, on the theory that whatever our enemy hates must be good for us."

7) Somebody famous (Buffett, perhaps? I don't remember) said something pithy--something about not letting the tail wag the dog (not letting taxes drive your investments).

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