You realize, of course, that this may be the last column I ever write.
It's entirely possible that after reading this, the "Powers That Be" here at Fool Global Headquarters will surround my desk brandishing pitchforks and torches, whisk me off to the bowels of Fool HQ, and feed me to the racing hamsters that have long powered this very website.
I'm about to share with you a secret that I've kept from everyone here since Day 1. But, before I do, I want to tell you that my fantasy investment portfolio is up 547% since July 1998.
For the record
Way back when, I wanted a public record of my rantings, so I started keeping a very public record of every fictitious trade that I made. I started with $10,000 phoney Fool bucks and have since parlayed that into $64,659 equally phoney dollars.
Metaphysical doubts about whether I would have actually achieved these returns in a real-money portfolio aside, I'm pretty darn proud of this record. The Bogey's Bungalow portfolio has returned 40.52% annualized over five and a half years, in spite of the worst bear market in history having kerplunked itself right in the middle. By contrast, if I had invested all the money in S&P 500 Depositary Receipts back in July 1998, I'd have lost $37.70.
So, why am I tooting my horn when I'm generally such an unassuming, laid back, and humble fellow? I guess that brings me back to my "secret." Come closer to the monitor. Closer....
God, what are you doing?! You can't actually hear me through this stupid thing. Pull your head back and keep reading.
I like to read stock charts. There, I said it. That felt good -- York Peppermint Patty good!
Confessions of a chartist
I like technical analysis. I follow trends. I love mechanical investing and other stock screens. While I think it's very helpful to understand how to value a business by calculating the net present value of a company's future cash flows into perpetuity, I don't plan on holding very many investments into perpetuity. I sometimes get a headache when thinking about discounted cash flow analysis. After all, perpetuity is a pretty long time, and I could get hit by a Mack truck tomorrow.
Kidding aside, I think it's important for anyone trying to beat an index fund with individual stocks to understand how to value stocks. Whether you're a disciple of Graham & Dodd, Phillip Fischer, or HowardRoark, you need to know why the stock market values companies the way it does. Don't let my heretical talk about stock charts and trends sway you from learning about fundamental investing. Indeed, a fundamental understanding of the companies I invest in is paramount to my success, and a lack of fundamental understanding is also my occasional downfall.
The point of all this is to impress upon you that there isn't just one way to find investment ideas and be successful. Despite what some people might have you believe, there is no single perfect way. Don't believe anyone who tells you otherwise. Investors need to develop their own styles and approaches to their portfolios. For some, that may mean reading stock charts or goat entrails. For others, it may mean poring over balance sheets and talking with company management. Both have worked well for me.
A few good examples
Back in 1998, a stock chart made me aware of CheckPoint Software, but it was Microsoft's Steve Ballmer's comments about Mr. Softy getting into the VPN game that caused an inefficient drop in CheckPoint's stock and made me even more confident of the idea.
A mechanical investing stock screen clued me in to EMC in early 1999. That same unemotional stock screen discipline had me sell EMC for a 129% gain a year later. If you haven't checked out the Mechanical Investing board in the Fool Community, you should. It's a great place to learn about stock screens and unemotional investing.
Faith in the recovery of the online economy had me investing in AOL, now Time Warner, Yahoo! (Nasdaq: YHOO ) , and CNET. Yahoo! has been kind, but Time Warner and CNET are still deep in the hole. You win some, you lose some.
Lest you think I'm a complete buffoon (too late, eh?), it was good old fundamental analysis that put me on to Guidant, and Rambus (Nasdaq: RMBS ) . Guidant's prospects in the drug-eluting stent business, along with a stock I felt should be valued at $60, was reason to pull the trigger there.
Rambus' stranglehold on the DRAM market, and the unbelievable research done by the denizens of our Rambus discussion board made me very comfortable about taking a position in the designer of top quality memory chips. And, truth be told, I didn't really become interested in it until fellow Fool Tom Jacobs started raving about what a great company it was. Sometimes water cooler talk pays off, too.
Finally, just to show you that it's not all roses in Bogey's Bungalow portfolio, a total lack of discipline and fundamental understanding led me to hold shares of Metromedia Fiber Networks straight into bankruptcy, even after riding the stock up close to 200%! Remember, bulls make money, and bears make money, but pigs get slaughtered. What a pig that was. What an idiot I was for not paying closer attention.
Enough about the past
Well, we're 900 words into this column and assuming you're still reading, and assuming the editors haven't cut this out, I think it might actually be safe to tell you what stocks or trends I see in the market that have piqued my curiosity to learn more. In no way am I recommending any of these stocks, but here's what's been on my mind lately.
1. Telecom -- Maybe not an original idea, but so many of the supposedly dead telecom stocks are waking up. Several technical chart screens have a number of the telecoms looking pretty good. Most notable to my eyes are Nortel Networks (NYSE: NT ) , Level 3 Communications, Sprint, and Nextel Partners (Nasdaq: NXTP ) . If you believe that corporate budgets for telecom spending will increase in the coming few years, this area might be well worth a look. AT&T (NYSE: T ) rounds out my telecom interest, not only because of its decent looking chart, but because it trades at about 6.5 times trailing free cash flow. Thanks to TMFBuck for planting that idea in my head.
2. Borg Warner (NYSE: BWA ) is on my fundamentals radar. The company recently backed fiscal 2004 estimates of $7.10-$7.30 per share, which puts the stock at 12 times future earnings, growing around 15%. The stock is at an all-time high with good reason (and, incidentally, Tom Gardner recommended it in Motley Fool Stock Advisor). Is it still cheap?
3. Marketwatch.com is also on my fundamentals radar, albeit a slightly more speculative blip. The company has close to $50 million in cash on its balance sheet and trades with a $150 million market cap. They'll likely pull down $45 million-$50 million in revenue this year, and their big bet on becoming a news and data distributor like a Reuters or Dow Jones has paid off in spades. The other obvious idea in this area is TheStreet.com, but it's still unclear to me how well their institutional forays are paying off.
4. H&R Block (NYSE: HRB ) is a company that has worried me ever since I learned that they earned as much EBIT (earnings before interest and taxes) in their mortgage division as they did in their entire tax division. Clearly, Block made a great play by getting into the mortgage business. However, with a cooling real estate market and interest rates with nowhere to go but up, I worry. The OLDE Discount acquisition hasn't gone well so far, and it will be interesting to see how an improved stock market has impacted the financial advisory component of their business.
That's it for now. I hope you've enjoyed this edition of Confessions from Inside Fool HQ. Assuming the editors let me write again, I'll be back next week with some new ideas for you. If you're so inclined, check out the history of the Bungalow portfolio on my discussion board. It's been fairly quiet on the board, as I tend to go long periods without making any moves, but it'll be nice to have some company -- especially, if I'm accessing the board from deep inside the bowels of Fool HQ.
See you next week....
David Forrest thinks everyone should know how to value businesses, irrespective of where they get their ideas. He also thinks you should eat your peas and get plenty of exercise. The Motley Fool has a disclosure policy, and as of this writing, David Forrest doesn't own any of the stocks discussed in this article.