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Yeesh, I'm gone for a week, and things start decaying into a flame fest.

x62656172 (jpt) wrote:
3) Synch's answer (PLEASE correct me if i'm wrong, Synch) seems to be : 'Snoop is correct. The original work was flawed. I (Synch) will try to do it properly; I (Synch) am uncomfortable that TMF continues to tout a strategy whose original support is Flawed'

In general, this is correct. "Touting" tends to be a loaded word with lots of connotations, but I have stated in the past that I am uncomfortable with some of the ways in which the Fool4 is marketed, especially since it is targeted towards those new to investing.

When I first came to TMF after reading the Investment Guide (long before joining the TMF staff), I was fascinated with the idea of the Foolish Four. At the time I arrived here, there was a lot of work being done by Timberfool, Montanafool, Rayvt, and elann (now TMFElan), in building a more complete historical database and analyzing the results. (This was a "quarterly" database, and was the precursor to the Dow Monthly Database available from Timberfool). One item that came out of that was that the "drop #1" for RP4 worked great for January but didn't work as well for starts in other quarters.

I guess my perspective is slightly different. I was not overly worried about the "official" TMF view, because it was obvious that there was a ton of work being done by board contributors. Several of us disagreed with the "20%+" returns mentioned in the Investment Guide, but we approached it in a different manner.

Unfortunately, the board as it is now has become an "us vs. them" battleground. Both sides have contributed to the atmosphere, and that's a shame. (I certainly hope that I haven't contributed to it). For what it's worth, the "naysayers" main point of contention isn't "The Foolish 4 doesn't work", but rather "The Foolish 4 doesn't work AND TMF is being irresponsible (at best) in continuing to promote it".

I haven't said very much regarding the statistical arguments recently because there's not much worth saying until I can crank out more numbers. We just concluded our big deadline at the day job (tax season, corpoate returns are due on September 15) so I finally have some free time available to get back to that. I believe I've stated the tests that I'm in the process of doing already, but I'll repeat them if anyone is interested.

The arguments regarding the Foolish Four can be summed up very quickly in about three sentences. The Foolish Four performed very well during a specific period of time. However, if you dissect enough data, you're bound to find some strategies that outperform from random chance. When you look at data other than the original data (namely January starts outside of the discovery period, and non-January starts within the discovery period), the Foolish Four has not outperformed or has outperformed to a much lower extent.

This doesn't conclusively prove that the Fool4 won't work in the future, but it makes a compelling prima facie case. Thisd puts the burden on TMF (and myself as a TMF employee) to delve into the data further. I finally have the time to get that done.

There is a separate issue from this. The Fool4 has performed very poorly recently, and many people are understandably frustrated with that. I want to remind people that ANY stock investment strategy is going to go thru bad periods. If the Fool4 "doesn't work", that merely means that we'd expect it to match the Dow index, less transaction costs, and be more volatile than the index. This does not mean that we'd expect it to underperform over a signficant period of time.

However, regardless of whether or not the Fool4 is valid, there will times when it does much worse than the index. No investment strategy is guaranteed to give you superb returns in any given year. For example, people are often advised to put their long-term savings into stocks instead of bonds or a money market account, as stocks will do better over the long haul. This is generally good advice, however there have been times when the stock indices have underperformed US Treasuries or corporate bonds for periods of as long as 15 years or more. It's uncommon, but it has happened.

What does this mean? Whenever you consider any stock investment strategy, you must be aware of the potential downside. This doens't mean you have to preapre for the end of the world, but ask yourself "if this investment dropped 30% over the next 12 months, could I handle that?" If the answer is "no", then you should seriously rethink your decision to invest in stocks (and yes, even the broad indexes like the S&P 500 can drop that much in 12-24 months).

As to the "naysayers" motivations; I don't worry too much about that. The important thing is to evaluate the arguments that are being made as well as one possibly can. Sure, sometimes people say things in a manner that ticks me off, but that's separate from the issues involved.

I would also advise anyone just starting to use TMF as a resource to learn, not as a source to be blindly followed. We have a variety of different investment strategies here at TMF. I doubt if anyone would use all of them in their own portfolios. The Rule-Breaker strategy looks for up and coming "revolutionary" companies that are high risk, and it ignores "valuation" issues. The Boring Port takes valuation very seriously. This doens't mean that one port is "right" and the other is "wrong", just that they reflect very different ways of selecting companies.

Hope this helps a little.

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