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Cash-King Port

The Cash King Portfolio has been renamed the Rule Maker Portfolio.

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11 Steps:
 1: Philosophy
 2: Mastering Finances
 3: Allocating Savings
 4: Finding Ideas
 5: Getting Information
 6: Cash-King Criteria
 7: QuaVa & Flow
 8: Ownership
 9: Putting It Together
10: Retirement
11: Getting Answers

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Related Items

• Hall of Portfolios
• Rule Breaker Port
• Rule Maker Port
• Boring Port
• Drip Port
• Foolish Four Port
• Harry Jones


Cash-King Portfolio Report
Friday, January 30, 1998
by Tom Gardner (TomG@fool.com)

ALEXANDRIA, VA (Jan. 30, 1998) -- The first Friday in the history of the Cash-King Portfolio has arrived, and here we sit without a single share of stock in the portfolio. Yesterday's announced intent to purchase shares of Microsoft hasn't yet been fulfilled. We have four more market days to complete the trade and plan to meet that obligation early next week.

In the meantime, a few questions rolled through our Cash-King message folder yesterday, and I wanted to answer one today. AOL poster "Rozz227" wrote:

"Did I miss something? Is Tom only buying
$1800 worth of shares of Microsoft? Does
MSFT have a drip plan? Is this what he is doing?"

The answer to Rozz's question is that Microsoft doesn't have a DRIP. We'll be using a deep-discount broker for the dozen trades we'll be making over the next few weeks. Our commission charges will run below $10 per trade. There are a number of deep-discount brokers out there, from Ceres to E*Trade to ScotTrade to SureTrade et al. Most are now charging less than $15 per transaction -- oddly enough, subverting the market for direct-purchase plans.

So, Rozz, we'll be buying around $1,875 worth of Microsoft in the week ahead, and that means that our sub-$10 commission will fall below 0.5% of the value of the overall trade. Our aim in the Cash-King Portfolio is to keep our commission costs less than 1% at entry (under $10 trade for a $1,000 investment, under $50 trade for a $5,000 investment, etc.) As noted above, because of the deep cuts in commission costs at discount brokers today, I'm actually much more attracted to setting up a brokerage account for a portfolio of this size than building a DRIP program. Emphasis, though, on "a portfolio of this size" because what they're doing over in the Foolish DRIP Portfolio is absolutely ideal for smaller accounts.

I want to make sure that everyone is clear on the financial details of the Cash-King portfolio. We have an initial $20,000 to invest, of real money in a real discount brokerage account. Over the next few weeks, we'll be purchasing eight large growth companies that meet all or most of the Cash-King criteria as outlined in the 11 Steps to Cash-King Investing. We'll be investing around $1,875 in each of these eight stocks (8 x $1,875 = $15,000). The remaining cash will be split into the Foolish Four stocks (4 x $1,250 = $5,000), which will be rotated every eighteen months.

Now, in addition to this $20,000 in start-up capital, we'll be adding $2,000 of savings to the account every six months. Yep, Cash-King investing encourages regular savings for long-term investment. That moola will either be added to our existing holdings or used to introduce new positions. For the record, I can't imagine a scenario where we ever have more than 15-17 stocks in the Cash-King portfolio. Finally, to restate our aim on transaction costs, we're intent upon keeping our commissions below 1% on each of our buys. Thanks for the query, Rozz.

Another veteran Fool -- among the most Foolish of the Foolish, actually -- Huibs pht dropped a note that read:

..hey, I was all set to see a slew of buy reports tonight in the cash king 'folio..

..MSFT..

..only one??..

..rats, already own it..

..how long 'till we complete this portfolio??..

..drooling in anticipation.....well, more like the novocain is wearing off..

..MORE PICKS PLEASE!!..:)

- Huibs

Early next week, we'll announce our second and third additions to the Cash-King Portfolio. I expect that by mid-February, we'll have all 8 CK stocks and the Fool Four announced and purchased.

And... next up today, I've received a number of extremely Foolish e-mails about the decision to purchase Microsoft. More of those notes were in favor of doing so than ag'in it, but a colorful selection of both. I'd ask you to please post your thoughts and queries about this and other CK matters to our message boards, since my email-box is looking like a flood site, mid-storm. Someone swim out to save me... I promise not to pull you under!

The other reason to post to the folder is that there are some very interesting contributions from readers across the land, among them today an excellent post from Tom Ball -- an engineer in the JavaSoft division at Sun Microsystems -- about the risks of the stock-option plan at Microsoft (click here to read that: Microsoft Option Plan).

See you in the folders!

To close tonight, I'd like to pull out a quotation from Peter Lynch's spectacular second book, Beating the Street. Many adoring fans of his first book, One Up on Wall Street were less enthused about his second one. Paint me contrary there because I find myself gleefully dipping back into Beating the Street over and again. Here's an important line from page 157:

A company with a high p/e that's growing at a
fast rate will eventually outperform one with a
lower p/e that's growing at a slower rate.

The reason for this is simple. The market rewards enduring rapid growth more richly than it does temporarily undervalued moderate growth. I believe the lower p/e stock described above will typically provide steadier growth and less volatility. But when the final results are tallied -- a decade, two, three and four ahead -- the high p/e stocks of today that match up with sustainable 10-20% yearly earnings growth will markedly outperform the market.

Consider this: If a company grows its earnings 20% per year for ten years, and those earnings are pure (not tainted by a weak balance sheet) and defensible (not propped up by a management focused exclusively on the short term), then that company has grown earnings by 519% all told. So is a p/e of 40 today too high for that sort of business? I think the market is beginning to realize that it isn't.

Since the managers of your Cash-King Portfolio (Rob Landley, Al Levitt, Phil Weiss, and I) are thinking twenty to thirty years forward in this account, we can afford to discount even farther ahead on valuation to allow for the purchase of a great business. For example, if Microsoft (and/or its slew of Department of Justice-broken-out components) grows earnings by 13% per year for the next thirty years, that's 38,000% of earnings growth. If the balance sheet remains strong, the management stays focused, and software & the Internet play as dominant role in the business world of the 21st century as we expect, then... is Microsoft's p/e multiple today of 50x earnings too high?

I know I've made a lot of assumptions in the above paragraph, but please concentrate on the principles of the point, not the specifics. If the principles make sense, then Fools may understand why we're emphasizing the quality and potential of businesses as opposed to the financial world's heavy concentration on the present value of those businesses. If you can find the 13-15% annual earnings grower over 20 years, and you can afford to hold through the two decades, what p/e should you be willing to pay today?

Fools, we believe that the student of business who is also a long-term investor has extraordinary advantages competing against Wall Street today. The financial industry's professionals are necessarily focused on the short-term values (due to their compensation models). Right now, they derive little value for thinking 20-30 years ahead for their clients; they derive great value from thinking 2-3 weeks ahead. And that leaves us loads of opportunities in the decades ahead.

See you in the folders!

Cash King on Web

Fool on,

Tom Gardner (TomG@fool.com)

 

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