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Discard the one with the lowest price.

Put 40% of your money in the stock with the second-lowest price.

Put 20% in each of the three remaining stocks.

One year later, sort the Dow the same way and reset the portfolio according to steps 1 through 4.

Repeat until wealthy.

Over a 25-year period, the Motley Fool claimed, this technique would have beaten the market by a remarkable 10.1 percentage points annually. Over the next two decades, they suggested, $20,000 invested in The Foolish Four should flower into $1,791,000. (And, they claimed, you could do still better by picking the five Dow stocks with the highest ratio of dividend yield to the square root of stock price, dropping the one that scored the highest, and buying the next four.)

Let’s consider whether this “strategy” could meet Graham’s definitions of an investment:

What kind of “thorough analysis” could justify discarding the stock with the single most attractive price and dividend—but keeping the four that score lower for those desirable qualities?

How could putting 40% of your money into only one stock be a “minimal risk”?

And how could a portfolio of only four stocks be diversified enough to provide “safety of principal”?

The Foolish Four, in short, was one of the most cockamamie stock-picking formulas ever concocted. The Fools made the same mistake as O’Shaughnessy: If you look at a large quantity of data long enough, a huge number of patterns will emerge—if only by chance. By random luck alone, the companies that produce above-average stock returns will have plenty of things in common. But unless those factors cause the stocks to outper-forms, they can’t be used to predict future returns.

None of the factors that the Motley Fools “discovered” with such fanfare—dropping the stock with the best score, doubling up on the one with the second-highest score, dividing the dividend yield by the square root of stock price—could possibly cause or explain the future performance of a stock. Money Magazine found that a portfolio made up of stocks whose names contained no repeating letters would have performed nearly as well as The Foolish Four—and for the same reason: luck alone.14 As Graham never stops reminding us, stocks do well or poorly in the future because the businesses behind them do well or poorly—nothing more, and nothing less.

Sure enough, instead of crushing the market, The Foolish Four crushed the thousands of people who were fooled into believing that it was a form of investing. In 2000 alone, the four Foolish stocks—Caterpillar, Eastman Kodak, SBC, and General Motors—lost 14% while the Dow dropped by just 4.7%.

As these examples show, there’s only one thing that never suffers a bear market on Wall Street: dopey ideas. Each of these so-called investing approaches fell prey to Graham’s Law. All mechanical formulas for earning higher stock performance are “a kind of self-destructive process—akin to the law of diminishing returns.” There are two reasons the returns fade away. If the formula was just based on random statistical flukes (like The Foolish Four), the mere passage of time will expose that it made no sense in the first place. On the other hand, if the formula actually did work in the past (like the January effect), then by publicizing it, market pundits always erode—and usually eliminate—its ability to do so in the future.

All this reinforces Graham’s warning that you must treat speculation as veteran gamblers treat their trips to the casino:

You must never delude yourself into thinking that you’re investing when you’re speculating.

Speculating becomes mortally dangerous the moment you begin to take it seriously.

You must put strict limits on the amount you are willing to wager.

Just as sensible gamblers take, say, $100 down to the casino floor and leave the rest of their money locked in the safe in their hotel room, the intelligent investor designates a tiny portion of her total portfolio as a “mad money