David and Tom Gardner's first book, The Motley Fool Investment Guide: How the Fools Beat Wall Street's Wise Men and How You Can Too, introduces investors to the Fool's three-tiered stock-picking strategy. The Fool's approach is supposed to help both novice and experienced investors beat most mutual funds and the market over the long term. The book says these strategies aren't for day traders or for investors with money they can't afford to lose. But they're not for most long-term investors, either.
The cornerstone of the Fool's strategy--one that purportedly takes just 15 minutes per year to execute--involves buying the Foolish Four. It's a derivation of the Dogs of the Dow approach. Here's how it works. Pick the five lowest-priced, highest-yielding stocks in the Dow Jones Industrial Average. Toss out the lowest-priced stock. Then, put 20% of your assets in each of the remaining stocks and 20% extra in the second-lowest-priced stock. That's 100% of your assets in four beaten-down stocks. Don't touch your holdings for one year, no matter what happens. From 1972 to 1996, this strategy compounded at 25% per year.
For investors willing to spend more than 15 minutes per year on their investments, the Motley Fool recommends adding small-cap growth stocks to the Foolish Four mix. By doing so, says the Fool, you can generate average annualized returns in excess of 25%. Finally, for investors who are willing to log some serious investment-research time, the Motley Fool recommends--get this--betting against particular stocks' price increases, or shorting.
The ultimate Foolish Investment Portfolio is comprised of 20% to 30% in the Foolish Four, 50% to 60% in growth stocks (particularly small-growth names), and up to 20% in shorted stocks.
Needless to say, I question the Fool's stock strategies. The Foolish Four approach hasn't consistently delivered since the Fool introduced it to the world in 1996, and I haven't met many investors who are willing to put their entire nest egg in just four value stocks. Finally, suggesting that any investor should place up to 20% of his or her assets in shorted stocks is downright irresponsible.
Sure, The Motley Fool Investment Guide does explain many investment concepts in easy-to-grasp, fun ways. If you want to learn about investing from the Fool, check out The Motley Fool's You Have More Than You Think instead. The goofy Foolish Four strategy rears its head in that book, too, but the advice in the rest of its pages is far less dangerous.