Rule Breaker Portfolio

Permanence in Volatility
CBS This Morning goes Springer!

by David Gardner
(
DavidG@fool.com)

ALEXANDRIA, VA (Sept. 1, 1998) -- Amid incredible volatility, the market gained back half of yesterday's losses. It was both amazing and amusing (in retrospect) to see a stock like America Online shed $15 by 10:30 a.m., then close up for the day (most actively traded stock on the NYSE).

Most market days are fortunately not this volatile, just as most market months don't show gains or losses of 20% (like August, f'r'instance). The S&P 500 rose 3.83%, itself beaten up on by the Nasdaq, up 5.06%. Our humbled Fool Portfolio gained a comparatively measly 1.71%, retracing only a modicum of yesterday's 13% drop. So while the major market indices bounced back more than halfway, lesser-known holdings didn't participate quite as much. The Russell 2000, the broadest index for small caps that we quote at quote.fool.com, was up just 3.00%.

Just 3.00%? Kind of silly, isn't it? Three percent is a big move any day of the year, whether it's been preceded by a 5% loss or a 2% gain. Some bears will inevitably call this a "sucker's rally."

Hey, maybe they're right.

I mean, who knows where the market's going? Nobody at Fool HQ, I can tell you. We don't make that kind of presumption, as aware as anyone -- and trying to spread that awareness -- that calling the market is a fruitless endeavor. This truism isn't just being broadcast from Fooldom (though would that more media companies understood this); we also happened upon this text (worth quoting at length) from the recent Tweedy, Browne Global Value Fund annual report:

In our opinion, far too much attention is devoted to speculation about events that we cannot predict. With enough so-called experts making so many predictions, someone is bound to be right. However, as a simple investor, how are we to determine who has made the correct prediction? The answer is: we cannot. This has not put a stop to people holding themselves out as experts and who claim to know what the future will bring, nor legions of others willing to accept such predictions as having validity.

Plus, as these Foolish fund managers (yes, such a thing exists) go on:

Calling one movement in the stock market is of little value over the long term, and we are not aware of anyone who has compiled a long-term record of successfully predicting stock market movements.... As we have said in the past, the stock market will decline at some point in the future. We do not know when or by how much, and we do not know what event or circumstances will precipitate the decline.... We could cash out now, wait for the decline and then reinvest when it reaches the bottom. This presumes one can determine when the bottom has been reached, and if the decline has been particularly disquieting, would have the courage to go back in. We could have done this last year, two years ago, or even three years ago. The same apprehension about stock prices has existed in varying degrees for several years. Cashing out one, two or three years ago would have been a costly mistake in terms of foregone profits.

Too true. One final Foolish quote (I love being able to share such Foolishness):

Over the long term, stocks have outperformed bonds and cash. With the exceptions of the 1973-74 market and the Great Depression, it has not taken more than two years for stock prices to recover losses experienced in a bear market. Generally, recovery takes far less than two years. We find these odds favorable to investors and therefore see no reason to do anything differently than we have for many, many years.

Contrast these words with those spoken on today's CBS Morning Show. Tom and I provided our viewpoint on the markets, stating something very similar to what you've read above, actually. Following that, two other financial advisors with whom we were not familiar came on the show to explain how wrong we were. One of them grew red in the face and began pointing at the television screen, an embarrassing similarity to a Jerry Springer Show guest (it was in fact the closest that the mostly sanguine "good morning" network shows ever get to Jerry Springer). Pointing repeatedly, these words were uttered (verbatim transcript):

"Let me tell you something. Let me look into this camera, okay? I'm from Wall Street for a lot of years. I'm so tired of this long-term, buy and hold, everything's going to be all right, it's a bunch of baloney! The market goes down 500 points, the market goes down, it goes down, it goes down, up a little bit too. Let me tell you Mr. Motley Fools and everybody else going on, that the long term is the easiest cop-out way to talk about the market. Yes, if the market continues down, then you take 7 or 8 or 9 years to get the value back again in your retirement plan. And you can keep knocking [us] who are bearish of saying, take your profits off the table, go into treasuries, go into money market funds, go into the sidelines and wait for a better day. You tell the retirees that have been told by Wall Street to go do high tech stocks so they can boost up their retirement plan, you go make up the difference of money to them. Well, they don't have any money, because they are long-term buyers."

There are so many misguided statements in that paragraph that it would take too much time to sort them all out. Briefly, it was clear that neither of the commentators understood what we mean by "long term." It was apparent that they were unaware how technology stocks (and all stocks, really) have actually done over the past several years during which (supposedly) all these retirees have been told to "go do high tech stocks" and now "don't have any money." After the show I was informed that one of the commentators has essentially advocated fixed income (bonds, T-bills) more often than not over most of this decade... the best decade in stock market history. And now with the market having regained half of its drop from yesterday, this all looks like just so much sturm und drang... sound and fury, signifying nothing.

Tomorrow, and tomorrow, and tomorrow....

Again, maybe we drop 10% tomorrow. Maybe we gain 1% tomorrow. Maybe we lose 15% in the fourth quarter. Maybe we instead gain 20% back and close with the fourth year in a row of 20%+ gains (unprecedented). If I sound idle and silly on this subject, it's because all such speculation will always be idle and silly. Those who depend upon it, invest upon it, and believe in it are usually gullible and unFoolish.

To restate the Foolish investment approach succinctly, once again:

We use the market as a long-term savings vehicle, buying amounts of stock on a regular (paycheck by paycheck) basis in the best companies we can and holding for the long term. I happen to be 32, but for anybody up to the age of, say, 45, that should work splendidly. (That's actually most of us, as the median age is 34.) Now, as you get older, you need to begin to move retirement money (whatever money you'll really need) into bonds and T-bills, guaranteed fixed income paid to you by the U.S. government -- the safest form of investment in the world. Live and die Foolishly (and with this last dictum, I am not referring to investing).

This is the Foolish investment approach, and it in fact mimics the eloquence and outlook of Tweedy, Browne -- successful value investors... not commentators (those who are generally, as the wag says, well-known for being well-known). This outlook and approach couldn't be more different from the antics of market timers, often charlatans who convince some people to rejigger their asset allocation on a regular basis, usually on nothing more than guesswork.

The Untold Story: Later in the day, I heard these same commentators on their local radio show advocate that an actor with $5,000 to $10,000 to invest seriously investigate the prospect of taking a daytrading course...

-- David Gardner

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Bookmark Live Fool Port Quotes

09/01/98 Close
Stock Change Bid ---------------- AMZN -3 13/16 79.94 AOL +3 1/2 85.00 T +3 1/4 53.75 DJT --- 3.06 DD - 13/16 56.81 XON + 15/16 66.38 INVX + 1/4 10.63 IP + 13/16 37.81 IOM - 1/16 3.56 KLAC +4 1/8 25.38 LU +6 1/2 77.25 SBUX +1 32.56 COMS +1 13/16 25.50 TDFX +1 1/2 10.63

Day Month Year History Annualized FOOL +1.71% 1.71% 17.08% 292.92% 39.92% S&P: +3.83% 3.83% 2.45% 116.89% 20.93% NASDAQ: +5.06% 5.06% 0.30% 118.71% 21.18% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 85.00 2237.45% 9/9/97 580 Amazon.com 19.11 79.94 318.29% 10/1/96 84 LucentTech 23.81 77.25 224.47% 5/17/95 1960 Iomega Cor 1.28 3.56 178.23% 4/30/97 -1170*Trump* 8.47 3.06 63.84% 8/12/96 130 AT&T 39.58 53.75 35.81% 2/20/98 200 Exxon 64.09 66.38 3.57% 2/20/98 215 DuPont 59.83 56.81 -5.05% 2/20/98 270 Int'l Pape 47.69 37.81 -20.71% 7/2/98 235 Starbucks 55.91 32.56 -41.76% 8/24/95 130 KLA-Tencor 44.71 25.38 -43.25% 8/13/96 250 3Com Corp. 46.86 25.50 -45.59% 1/8/98 425 3Dfx 25.67 10.63 -58.61% 6/26/97 325 Innovex 27.71 10.63 -61.66% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 60350.00 $57768.13 9/9/97 580 Amazon.com 11084.24 46363.75 $35279.51 4/30/97 -1170*Trump* -9908.50 -3583.13 $6325.38 10/1/96 84 LucentTech 1999.88 6489.00 $4489.12 5/17/95 1960 Iomega Cor 2509.60 6982.50 $4472.90 8/12/96 130 AT&T 5145.11 6987.50 $1842.39 2/20/98 200 Exxon 12818.00 13275.00 $457.00 2/20/98 215 DuPont 12864.25 12214.69 -$649.56 8/24/95 130 KLA-Tencor 5812.49 3298.75 -$2513.74 2/20/98 270 Int'l Pape 12876.75 10209.38 -$2667.38 8/13/96 250 3Com Corp. 11715.99 6375.00 -$5340.99 7/2/98 235 Starbucks 13138.63 7652.19 -$5486.44 6/26/97 325 Innovex 9005.62 3453.13 -$5552.50 1/8/98 425 3Dfx 10908.63 4515.63 -$6393.00 CASH $11876.47 TOTAL $196459.84

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Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.