Message Font: Serif | Sans-Serif
 
No. of Recommendations: 3
Moebruin:

Thanks for your comments, but Datasnooper is right. I think you are judging my comments outside of the scope of my post. I was merely critiquing the logic of the arguments put forth by the creators of the F4. I was not specifically trying to comment on their validity.

I too have studied logic in school and I will live it to others to decide the validity of the Foolish Four. However, I must say one thing that logic does is allow you to twist and live out facts or theories.

I am not addressing the validity of the F4 (whether it works or not), I am addressing the arguments that claim to support the premise. I did not intentionally leave out facts or arguments but even if I did that would not change the logic of the arguments presented. Logic (like statistics) when applied correctly does not twist facts and theories. It is invalid logic that promotes the twisting of facts and that is what I was trying to point out. Now I am not saying that my post was 100% accurate (DaveThorman pointed out some inconsistencies in my post) but the post wasn't about my opinions concerning validity at all because I did not create the F4 arguments that I quote.

I'll try to point out where I think you are mistaken and restate what my original intent was.

I wrote: This step only works if you assume that cheap dividend equals cheap stock price (B=C) otherwise the argument does not support the premise. Any introductory finance class teaches that stock price is the present value of expected future cash flows, not past cash flows.

You replied: The actual logic: These are 30 of the strongest companies in the world. The fact that they are still paying high dividends is an indicator that they still have cash. The fact that they are huge and have cash is an indicator that they have the resources to make a turnaroud. The other scenario that hits FF stocks are that they are cyclic and the dividend is an indicator that they are on the down part of their cycle.

This step promotes the idea of dividend that is on sale or selling for less than what the market normally pays. As such this argument primarily address the “beaten-down” aspect of the strategy and not necessarily the “strength” aspect. Even you use words like “turn-around” and “down-part of their cycle”. I tried to show that there is no argument presented by the F4 to make the leap from cheap dividends to beaten down stock except implicitly. It is this implicit assumption that is a flaw. Not because it is wrong (although I believe it is), but because it isn't there! Assuming it was presented and I just never saw it, I gave an argument as to why it was wrong.

I wrote: The assumption that A (high volatility) = B (high future price) is a false premise because it based upon the informal fallacy of begging the question and therefore it is a flawed argument. It's the classic argument of “there is nowhere to go but up”. Well, except down.

You wrote I didn't know where to quote because you seem to come up with your own volatility theory.

Again, I am not claiming that volatility will go up, down or sideways (?). I am not presenting a theory, I am merely addressing the theory presented by the F4 and pointing out that the premise that volatility will go up for high-yield Dow stocks is solely based upon the data set that is in question. Therefore, that is a circular argument. If the F4 had evidence outside of the data set and referred to that, then that would NOT be begging the question. Whether that data exists or not is beside the point when analyzing the argument made, because the argument stems only from the data set.

The reason you go for the five lowest is that it is another indicator that the price is depressed.

Notice that you use the words “another indicator” which implies that the high-yield step is meant to identify “beaten down” stocks and not necessarily strong stocks. And again this argument is solely derived from the data set used, it is circular reasoning. This step claims that low price =good value. Why? Why does stock price in isolation indicate a good value? Only because it mattered in the data set. This is an observation not an argument. Again, I am not saying that low price does NOT equal good value, I am merely stating that there is no argument made as to why that would be. There are plenty or arguments to be made against that premise, but I put none forth.

You are investing in depressed stock prices of huge companies with lots of resources especially cash that are either in a down cycle or are in need of a turnaround. Volatility has nothing to do with the theory and thus you can argue all your want about it.

No argument from me. You are actually supporting my point here. I didn't promote the volatility argument but to say it has nothing to do with the F4 goes directly against the claims of those who created it.

The other steps I won't debate not because I necessarily agree with your arguments but because they are all little cherry picks at the data. Weather in reality they help or not is extremely arguable but in any case they have little to do with the premise behind the FF.

Agreed. They have nothing to do with the premise of the F4 and everything to do with increasing the returns with no logical arguments to support them.

Does the FF still work?

I wasn't trying to address this question at all.
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement