Fribble Thursday, December 16, 1999

A Fool Flowers

By Bosley (dillender@neo.rr.com)

For God's sake, give me the young man who has brains enough to make a fool of himself! -- Robert Louis Stevenson

It is really funny, actually. Here I am, a 25-year-old just starting out into the world, and I wasted one of my flashes of brilliance on a stock. Well, not really. The way it really happened was I wasted one of those flashes of divination everyone has, while I was playing the stock market... on paper.

In order to educate myself on market dynamics while I was paying off my debt, I took to selecting stocks in different groupings in order to find a comfortable investing strategy for myself. I started a few months ago trying totally mechanical variations (Fool Four, F4S&P, my own homebrew F4, etc). After watching my homebrew get wailed on by the other variations, and with the deterioration of my data due to the recent revamping of the Dow (Chevron, Sears, and Goodyear were all in my F4 portfolio), I decided to start over. By this time, I had also read Rule Makers, Rule Breakers. Now here was something I could really set my teeth into.

Being a technology person by both nature and profession, one of the weaknesses I saw with F4 and company was that all the wealth being generated by the tech stocks (MSFT, INTC, CSCO... the list goes on) was not going to be tapped by these methods until they raised their dividends, a sure sign that the boom was over. Rule Makers, Rule Breakers gave me a realistic methodology to pick those stocks that I personally understood best.

After I researched who would be the current members of the various mechanical methods, I chose four stocks for a combination Maker/Breaker portfolio. The team consisted of Cisco, Nokia, RedHat, and, as a cover for my tech exposure, Wal-Mart (Wal-Mart's idea of high tech: Deer Hunter). All and all, a fairly conservative portfolio. A trio of well-established Rule Makers, with a dash of the upstart RedHat for flavor. I hoped to beat the F4 by a few percentage points, maybe refine a few ideas along the way. With my equally split investments of $4000 into each of the portfolios on November 8th, my fate was sealed.

As I write this, it is December 8th. I am looking back on the last month with a combination of awe, and regret. Awe that my $4000 investment in my M/B portfolio returned a profit of a little more than $2300, about a 57% return in a month. Awe that I beat the nearest mechanical method by more than 60 percentage points. The regret, that I did not have the $4000 to invest, should be fairly obvious.

Okay, I concede that RedHat, whose $20, $30, and even $50+ daily gains account for more than $1500 of the gain, but if I even go as far to make its gains in line with the average gain of the rest of portfolio, say $400, I still gained 30% for the month. Heck, the way it worked out, I could throw out ALL of my winners for the month (RHAT, NOK, and CSCO) and still beat the other methods, since my 17 shares of Wal-Mart are only down 50 cents each from where I bought it, and the other methods all lost $100 or more of their initial values.

Fifty-seven percent monthly. That works out to be what, 684% compounded yearly? In a few years, I would be able to hire Bill Gates to be my towel boy. But alas, I know keeping that pace is impossible. I will be proud as a peacock to just maintain 57% yearly, or even half of that. And thus the waste. My insight in picking those stocks, at that exact time, for a paper portfolio. I guess I expect to be able to count on my fingers the times I beat the market by 30% (much less the 50+%) on a monthly basis in my lifetime. Plus, I can't use this last month as typical data for future learning.

But I did learn a few good lessons. First, for me, it validated the Maker/Breaker philosophy, at least in the short term. I know long-term data cannot be derived from such a small sample. But I would be willing to sit on that portfolio for five years and feel very confident I would be a much, much richer man. Second, I think I will replace Wal-Mart with General Electric. The main reason for the change is not that I feel Wal-Mart is weak in any way; I just do not understand the retail business process well enough to know it if or when Wal-Mart does eventually get in trouble. Every small step counts.

I guess to wrap this up, I would like to thank the Gardner brothers, and by extension the entire Motley Fool community. It is rare to find a group willing to share well developed methodologies. Most places, they will only pass out fish (and some places, only guppies), not the knowledge of how to fish. Even if The Motley Fool were disbanded, and its members forbidden to ever interact again, each of us have learned a few lessons that will make our lives easier. Again, thank you all.

May all of your successes be with real money, and your losses be just on paper.

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