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

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The Next Cash-King Pick
Where should we look?

by Al Levit
(alanl@ix.netcom.com)

Glendale, CA (July 17, 1998) -- Yesterday, I described how we might go about managing the Foolish Four portion of the Cash-King Portfolio. Today I'm going to share a few of my thoughts on managing the Cash-King component. As we add another $2,000 to the account here in the next few weeks, we'll have to decide where to put it.

For me, and probably for you, this is one of the great joys of investing. There should always be a little more savings money to add to your portfolio, meaning that there's always another decision coming down the railroad track. And, of course, we'll be trying to maximize the long-term returns (10 years and out) of this diversified portfolio. That thinking will guide us to our next selection this August.

When I'm faced with this sort of decision, I like to draw up a quick outline in which I ask questions like the following:

1) Do I make a new investment in the Foolish Four, Cash-King, or another part of the portfolio?

2) If this investment goes to the Cash-King side then:

a) What part does diversification play in the decision process?

b) Are there any new companies that I have become familiar with that I would like to begin owning?

c) Should I just buy more shares of the Cash-King companies that I already own?

Since I expounded upon question (1) at length yesterday, I'll start immediately with question (2) today. If you look at the existing Cash-King Portfolio, you'll find that five industry groups are represented (high technology, food & beverage, retailing, finance, and pharmaceuticals). To my thinking, this would represent great diversification across the portfolio, if it weren't for one thing: the fact that three of our five Kings are in high technology (Microsoft, Intel, and Cisco).

In a situation like this, I would not want to see my next investment in high technology. Equities are volatile enough. I believe that concentrating too many of the companies in one industry group unnecessarily increases the volatility. After all, there are a lot of great businesses and industries out there. So, I always ask myself: "Why force too much risk into the portfolio when I can match it by plowing a few other fields?"

Ok, so we'd want to find a Cash-King outside of the core of technology. Given that, we could increase our exposure to one or more of the groups by buying more shares of Pfizer, Coke, Gap, T. Rowe Price, or American Express. And normally I'd think that was a fine idea. Not this time, however. In part because I think we'll benefit from having a ninth company for purposes of diversification... but also, and perhaps more importantly, because -- gol dangit -- we've just had some great research this year in the Cash-King Companies Folder (web).

So, I expect we'll be looking for a non-technology Cash-King company to add to our portfolio this August.

Now, I have to make it clear that in the future I'm going to trend toward adding our new money to an existing holding. I'd like to see us someday holding the Foolish Four, 9 Cash-King companies, and 1 Cash-Prince (ascending to the throne and bringing greater profit potential with it). That would leave us with 14 companies, some defensive positioning, with a heavy focus on the long-term worldwide growth of America's consumer business. From there, I would primarily concentrate future funds into adding new positions. I believe that a 14-stock portfolio, diversified in this fashion, is rock solid.

But, in that situation, how would I determine which existing King stock to add to? I confess that I'd be sorely tempted to play what I call "Short-Term-Long-Term." It works like this:

To a large extent, the daily prices of our companies are set by the big institutions -- pension funds, mutual funds, banks and brokerage houses, etc. These organizations are basically short-term, quarterly-driven organizations, which tend to punish even our Cash-King darlings when bad news breaks.

This happened to Coca-Cola (NYSE: KO) last August, when it announced an earnings miss, or a low bottle count, or something else (I can't quite remember what it was anymore) that would affect the next quarter's results. The price promptly dropped 15%.

Microsoft's (Nasdaq: MSFT) troubles with the DOJ dropped its price into the low $60's in January, and again into the low $80's in May. Amazing to me, given its business momentum around the globe. It turns out the troubles were over-rated by short-term thinkers (as they often are with our C-Ks) and today Microsoft is trading at $119 after a very strong earnings report yesterday.

Now, in each of these cases, once the short-term crisis passed, the long-term business potential was again reflected in the stock price -- meaning, it slammed ahead. That's the simple, Foolish logic behind Short-Term-Long-Term (STLT) -- pretty cool, it has its own acronym now! STLT suggests that, once your portfolio is sufficiently diversified, you add to the one with the worst, yet in your mind also temporary, bad news out on it.

For me today, that's Intel (Nasdaq: INTC) -- our one C-K stock that's not in the black yet. All other things being equal, I would seriously consider purchasing more shares of Intel this time around. But as I noted above, all other things are NOT equal this time, with our portfolio currently over-weighted in high technology. Maybe next time, though!

You'll see that STLT is news-driven and valuation-driven, something that we ordinarily don't give a hoot about in C-K land. But heck, it's a fun game, and I like to think about maximal return (and thus, ideal short-term valuation) when adding new money to my portfolio. That doesn't mean I'd ever wait on valuation. I need to make it clear that I would NEVER wait for a short-term drop in price to invest in a new Cash-King, if I had long-term savings to invest. I'd look for the best value at the moment, but not waste too much time at it. As I'm in for the long-term and buying quality, I want to get IN as soon as I can. The market's long-term direction is, after all, up.

That wraps it up for me for the week. Rob will catch you on Monday. No doubt he'll have something nasty to say about my favorite software company. But holy cow, how about those earnings? I've never seen such a sparkling report in my life (sitting a smidgen ahead of Microsoft's last earnings report. And the one before that. And the one before that one. And that one previous to it. And so on, and so on, and so on....).

I'll be back with you all again three weeks from Monday. Until then, Fool on!

Al

Cash-King Strategy Folder
Cash-King Companies Folder

Today's Features -- It's what's going on at the Fool today.


07/17/98 Close
Stock  Change    Bid 
 ---------------- 
 AXP   +  9/16  115.81 
 CHV   -  5/16  82.81 
 CSCO  +3 15/16 99.69 
 KO    -1 1/16  86.13 
 GPS   -  11/16 65.06 
 EK    -  3/4   86.25 
 XON   +  15/16 72.38 
 GM    -  1/4   69.88 
 INTC  -1 1/8   83.06 
 MSFT  +  3/4   118.00 
 PFE   -2 1/4   115.75 
 TROW  +  7/8   42.44 
 

                  Day   Month    Year  History 
         C-K      +0.14%   6.93%  21.95%  21.95% 
         S&P:     +0.23%   4.66%  18.52%  18.52% 
         NASDAQ:  +0.41%   6.02%  21.53%  21.53% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    118.00    50.76% 
     2/3/98   22 Pfizer        82.30    115.75    40.65% 
     5/1/98   37 Gap Inc.      51.09     65.06    27.35% 
     2/6/98   56 T. Rowe Pr    33.67     42.44    26.03% 
    2/27/98   27 Coca-Cola     69.11     86.13    24.63% 
    6/23/98   23 Cisco Syst    86.35     99.69    15.45% 
    5/26/98   18 American E   104.07    115.81    11.29% 
    2/13/98   22 Intel         84.67     83.06    -1.90% 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     86.25    36.58% 
    3/12/98   20 Exxon         64.34     72.38    12.50% 
    3/12/98   15 Chevron       83.34     82.81    -0.64% 
    3/12/98   17 General Mo    72.41     69.88    -3.49% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    5/26/98   18 American E  1873.20   2084.63   $211.43 
     2/3/98   24 Microsoft   1878.45   2832.00   $953.55 
     2/3/98   22 Pfizer      1810.58   2546.50   $735.92 
     5/1/98   37 Gap Inc.    1890.33   2407.31   $516.98 
     2/6/98   56 T. Rowe Pr  1885.70   2376.50   $490.80 
    2/27/98   27 Coca-Cola   1865.89   2325.38   $459.49 
    6/23/98   23 Cisco Syst  1985.95   2292.81   $306.86 
    2/13/98   22 Intel       1862.83   1827.38   -$35.45 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   15 Chevron     1250.14   1242.19    -$7.95 
    3/12/98   20 Eastman Ko  1262.95   1725.00   $462.05 
    3/12/98   20 Exxon       1286.70   1447.50   $160.80 
    3/12/98   17 General Mo  1230.89   1187.88   -$43.02 
  
                               CASH     $94.76 
                              TOTAL  $24389.82 
   
 *The year for the S&P and Nasdaq will be as of 02/03/98 
       

</THE CASH-KING PORTFOLIO>

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