Wednesday, December 23, 1998
Accounting for a Year's Worth of Commentary
Part of what I love about the Motley Fool is that we do our best to hold ourselves accountable to you, our customers and fellow community members. You see that most clearly in the way the managers of our real-money portfolios publicly announce their trades before they occur and then track the performance numbers on a daily basis. To my knowledge, the Fool is still the only place on the planet where you'll see that kind of before-the-fact, now-and-forever disclosure.
You see our accountability efforts elsewhere, too, though perhaps in smaller ways. The Daily Double and Daily Trouble features include regularly updated performance tracking tables. Dueling Fools includes a "Flashback" section where we take a look at who's winning the Duel and who needs more lessons from the musketeers. Clearly, we've got more work to do, but we're out there trying every day.
I raise the issue because there's still too little accountability in the mainstream financial media. Recall that a number of major magazines ran some pretty scary cover stories during the August through October period when investors were told the sky might be falling. How many of these Chicken Littles said that "this time is different," that the market wouldn't recover quickly? How many talked about a return to "average" price-to-earnings ratios that would leave the Dow about 40% below where it is now? Well, I'm not naming names just yet. I'm going to wait until the new year to see if these guys explain to us why they got it wrong. I'm not holding my breath, but a Fool should remain hopeful, especially around Christmas.
Today, I want to confess some of my own sins as well as tout my successes. Given that I've covered at least 200 different companies in the past year, you'll be happy to know I'm offering only selected highlights.
First, I'll point out a success so you don't think I'm a complete idiot. On August 5, with the Dow around 8550 and in the early stages of the correction, I said I didn't think we would see a prolonged bear market "with inflation and interest rates edging ever lower -- or with an entire generation pumping their retirement money into the stock market like never before." I said a "10% or even greater drop in the major large cap players would seem to be literally a correction," something good for the markets. I concluded, "Personally, I think most long-term investors should be cheered by the recent market jitters and perhaps should even hope we see another leg down." Man, talk about earning your Fool's hat! In the face of fear, I was cheering for more. Ralph Acampora to the contrary, I remained sanguine.
Though the Fool doesn't offer actual stock recommendations (see our attorneys!), some features offer very clear opinions. My obvious failures this year have come in these most embarrassing spots.
Almost as soon as I said that enterprise software company DataWorks (Nasdaq: DWRX) was worth buying at $20 a share, it fell below $10 and never looked back. As I've written in a Daily Trouble, this was a case of paying too much attention to management without having enough independent visibility into the industry's dynamics. All the enterprise software companies have taken hits this year due to slowing growth. Still, the simple truth is that you're always going to know more about a company that you do business with than one that you don't. Ironically, my reference in the DataWorks article, to the Gap (NYSE: GPS), and to Peter Lynch's story about folks who always look for the most complicated investment idea, meant that at some level I knew the mistake I was making. Shame on me.
Semiconductor capital equipment maker Cymer (Nasdaq: CYMI) partly fits the same bill. How much can the average investor understand about a company in this business? I had been impressed by Cymer's position as the key supplier of an important laser used in making chips, by the company's forthright management team, and by its commitment to invest in the business even in a down period. But cyclicals are tough. One's always tempted to call a bottom before it's reached. I still believe my security selection was okay, but my timing was bad given that Asia's slowdown was a problem that wasn't going away in the near term. Assuming that investing in a complicated cyclical business makes any sense at all, I now think you simply must play hard to get. Name the lowest price you think the stock could possibly fall to, and then don't even think about buying it until it's at least 25% below that price.
My more recent suggestion to short K-tel (Nasdaq: KTEL), although a reprise of a smart call I made earlier in the year, would have been my most disastrous except that I'm quite sure the stock has been unborrowable since I wrote about it. As I warned in the article, that's one reason why it was not a great idea for a short-sell to begin with. Even if K-tel can manage to raise some money by issuing more stock, I'm still convinced the company is a classic Internet tulip that will eventually wilt. Yet, unlike some other tulips, K-tel the stock has a strong consumer appeal plus a small enough float to produce occasional flights of speculative fancy. Shorting the Internet wannabes has been dangerous and best undertaken, if at all, only after a spike. With the holiday Internet mania approaching, my timing on this one couldn't have been worse. Again, I should have known, and did know, better. Still, it's a good lesson in why you shouldn't short a stock just because you think it's overvalued.
I have had some public successes. I rightly argued that the market was undervaluing Intel (Nasdaq: INTC) last spring at $75. I warned that even after Sunbeam's (NYSE: SOC) plunge to $24 5/8, investors should wait to see what other bad news developed. And boy, did it! I was right about Amazon.com (Nasdaq: AMZN), at least until it reached $140 and I thought it was just too expensive to keep. I was right about Pfizer's (NYSE: PFE) Viagra being overhyped. I was right about Apple's (Nasdaq: AAPL) turnaround being for real and about IBM (NYSE: IBM) being a bargain despite its lame revenue growth. Plus, I correctly figured Novell's (Nasdaq: NOVL) new NetWare would be good for its stock and that the apparently expensive Home Depot (NYSE: HD) still offered value. I was also rightly skeptical about General Magic (Nasdaq: GMGC). Still, I was wrong about Coca-Cola's (NYSE: KO) ability to weather all storms and wrong about at least the market's reaction to the major changes afoot at Compaq (NYSE: CPQ).
That's a partial accounting. I'd love to be able to compare the stocks I write about to the S&P 500 to really quantify how I did, but that just doesn't make sense. Most of my articles, like others throughout the Fool, provide just an overview of a company with some take about what might happen in the future or what an interested investor might look for. They offer merely opinions as starting points rather than opinions as recommendations. Yet, as always, if you want to know what I think I missed about a particular stock, I'd be happy to talk about it.
We all want to enjoy investing, but part of that involves getting better at it. That requires that we face up to our failures as squarely as possible. We only do that by periodically examining how we're doing, not just in our actual portfolios but also in our more varied analyses of particular stocks or industries. That's why a year-end accounting seems like a pretty Foolish exercise. If you want to dissect your own failures over the last year, join us on the My Dumbest Investment message board.
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