The Week in Review -- June 18, 1999

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Choosing the Right Frame
by Jerry Thomas (

Maybe the most instructive thing I saw on The Motley Fool this week was a small number reported in Wednesday's Rule Breaker Report. There, below David Gardner's text (and fine text it is, spinning some very Foolish thoughts about stock valuation), you'll find recorded for all time the overall performance of the portfolio that day. Look it up: the value of the BreakerPort surged 10.70% in trading Wednesday. Cool, hey?

Maybe, maybe not. After all, it's just one day's trading. Shift your gaze a few millimeters to the right and you'll find a second number, this one indicating that despite Wednesday's amazing leap, the portfolio's overall returns for the month of June were down a very dismal 9.36% by that date. Suddenly that conspicuous 10.70% gain isn't nearly as impressive as it was just a moment ago. Keep losing value at that rate, and even a very large portfolio will dwindle to nothing very rapidly.

We are talking about framing again, a topic that has been earning persistent attention on the Fool since David introduced the idea in a Rule Breaker recap a little more than a month ago. Warren Gump (TMF Gump) gives the concept some play in Tuesday's Fool on the Hill commentary. Our perceptions may shift, but the value of the portfolio at a particular point in time remains exactly the same whether you're looking at it in light of the day's returns, or the month's. The only thing that has changed is our frame of reference. Change that frame, and your assessment of the data is transformed.

Moreover, there's no end to the number of frame-changes we can make. Shift your eyes to the right again, and you'll discover that, upon the close of trading Wednesday, the Rule Breaker's year-to-date returns were showing a more than reasonable 21.30% gain. Just as suddenly as the monthly decline made the Wednesday's one-day performance seem tainted, that year-to-date return makes June's results much easier to stomach. Even then, cynics will be quick to point out that as good as that 21.30% gain is, it pales in comparison to the more than 80% year-to-date return the portfolio was showing as recently as April. And that frame is just as valid as any of the others you might choose.

The question is, which frame serves you best?

Louis Corrigan (TMF Seymor) wrote a profile of Microsoft's Paul Allen this week. If you'd like to talk about framing, Allen certainly makes good material. As the third-richest man in America (behind Bill Gates and Warren Buffett), one might assume that he knows his way around a dollar. But Louis probes deeper. "Allen may have made the two worst investment decisions of the century," he writes, and goes on to examine the software billionaire's involvement in networking start-ups that may have left him billions poorer than he might have been had he spent more time watching his Portland Trailblazers than making boardroom deals. How do you rank him as a titan of industry? By his current net worth? Or by his record as a venture capitalist outside of Microsoft's sphere of influence?

Again, which frame serves you best?

You might like to follow your reading of Louis's piece with a reading of Alan Greenspan's testimony before Congress this week, a transcript of which is available here on the Fool. Greenspan's new catch-phrase "modest preemptive actions" seems to be getting almost as much attention as his "irrational exuberance" remarks of a few years ago. You can study those words for yourself, completely in context, without the distorting frames placed around them by the more sensational off-line media. Then celebrate Father's Day by looking into our annual Stocks for Dad special. You'll get some ideas to spark your own stock research. You might even be moved to turn your thoughts, for a few minutes, to your old man. See? The Fool even helps bring families together.

At The Motley Fool, our opinion is that the time frame that serves you best as an investor is one that encompasses your entire investing career. Given that frame, and in light of the fact that the Rule Breaker Portfolio is still less than five years old, the portfolio's very impressive annualized return of more than 60% is still only marginally significant. The size of Wednesday's return says more about the volatility of the stocks that dominate the portfolio than it does about the importance of those stocks to the performance of the portfolio over the long term. In similar fashion, the numbers you choose to pay attention to say a great deal about your own maturity as an investor.

A couple of other stand-outs this week: I enjoyed Tuesday's Daily Trouble by Rick Aristotle Munarriz (TMF Edible). Rick looks at the challenges facing Guitar Center Inc. (Nasdaq: GTRC), a company near and dear to me, because it is from them that I purchased my growling Martin Rosewood Dreadnought (serial #DR603485). Friday's Fribble by Lydia Vorsteveld (aka "lacow") is also worth your attention. Consider it your invitation from a member of our Community to join the conversation on our message boards.
Until next week,
Fool on!


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