FOOL ON THE HILL
My Report Card for 2000

In his final column of 2000, Whitney Tilson looks back at a year of good calls, bad misses, and the reasons behind them -- then points investors toward resources they can use to help them have more of the former and less of the latter in 2001.

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By Whitney Tilson
December 26, 2000

While it sometimes comes back to bite me, one of the things I like best about writing on the Web is the accountability. Therefore, I thought I'd use my last column of 2000 to review the best and worst advice I gave in my 40 columns this year (links to all of them are on my website).

While I will review my stock picks, keep in mind that recommending stocks is not the point of my writings. In fact, I strongly discourage anyone from buying or selling based on what I -- or anyone else -- argues. My goal is to help people think sensibly about investing and develop the tools to make good decisions on their own. This doesn't mean, however, that I think everyone should be picking stocks. To the contrary, as I argued in what was among my most controversial columns this year, The Arrogance of Stock Picking, "I believe an awful lot of people who are investing in individual stocks shouldn't be doing so... I wholeheartedly endorse stock picking, but only for people with realistic expectations, and who have what I refer to as the three T's: time, training, and temperament."

If the stock market has not treated you kindly this year, you might want to consider the arguments I made in this column and honestly evaluate whether you are likely to be able to pick stocks that beat the market over time. There is no shame in mutual funds -- or, better yet, index funds.

Bad stock picks
Let's get the ugly stuff out of the way first. My worst pick this year was the meVC Draper Fisher Jurvetson Fund (NYSE: MVC), a closed end venture capital fund. I suggested that it was "attractively priced" in mid-July at $16.56, and it has since declined 38% to $10.25 (all prices as of Friday's close). In my defense, I warned that "Venture capital is not for the faint of heart" and said that exposure to the Internet sector is "something I'd only recommend for a small percentage of your portfolio." I also argued that meVC was a much better bet than similar companies such as Safeguard Scientifics (NYSE: SFE), CMGI (Nasdaq: CMGI), and Internet Capital Group (Nasdaq: ICGE), which have declined 86%, 92% and 83%, respectively. I still think meVC is worth a hard look at today's price, and would suggest reading a recent article in Forbes on it, "Venture Capital At 44% Off."

My second worst call this year was American Power Conversion (Nasdaq: APCC), which I first wrote about last September. It did well for a while, rising to a peak of $48.84 in July, but it's been crushed since then due to two earnings warnings. After the first earnings warning, I recommended it in October at $17.56. But the second earnings warning made me concerned about the company's uncertain future and weak cash flows, so I announced my sale of the stock last month, when the stock was at $13.18, a 25% decline since I'd recommended it in October. Since then, it's down an additional 18% to $10.81. Unless it becomes a lot cheaper, I'm not planning to buy it back until I see some improvement in the company's free cash flows.

I wrote a bullish column on Ross Stores (Nasdaq: ROST) in June when the stock was at $15.87. After a string of sales and earnings disappointments and, more importantly, hearing devastating store reports from my readers, I announced in September that I would be selling. The stock closed that day at $14.25, a 10% decline since my June column (the stock has since risen 17% to $16.69). My opinion on the stock hasn't changed since my sell report.

I first suggested that Apple Computer (Nasdaq: AAPL) might be cheap enough to buy in my October 9th column, Perils and Prospects in Tech, when the stock was at $21.75. After analyzing the company's subsequent dreadful Q4 earnings announcement, however, I changed my mind and announced in early November that I would be selling. The stock closed that day at $21.43, down 1% since I'd recommended it, and has since fallen 30% to $15.00. The stock currently trades at only a slight premium to its cash holdings, but with a big loss expected next quarter and no plans to return a meaningful fraction of its cash to shareholders via a big stock buyback, I'm going to sit on the sidelines for now.

Good stock picks
I've always been a huge fan of Warren Buffett and Berkshire Hathaway (NYSE: BRK.A). Though it seemed that everyone was writing him off earlier this year as the Nasdaq soared and Berkshire Hathaway fell, I wrote in The Last Bull on Berkshire?: "I think it is highly unlikely that Berkshire Hathaway has turned into a dog of a business or that Buffett, after more than 40 years of investment genius, has become a fool -- yet that's how the stock is being priced today. I don't know when, but Buffett will be vindicated, and I intend to profit from it."

In late August and early September, I again recommended the stock in a two-part series (click here and here) that noted Berkshire's improving operations and soaring cash flows. I concluded that "Berkshire Hathaway is my largest holding because I believe it is an exceptional company that is widely misunderstood and significantly undervalued... I believe [its] stock could break out of its doldrums."

At the time of my February column, the stock was at $43,100. By early September, it was at $59,200. Today it is at $66,400, a 54% and 12% increase from those points, respectively. I remain very bullish on the company and believe the stock remains reasonably priced, though it's not dirt cheap anymore. During turbulent times like these, there are few stocks I'd rather own.

Finally, I recommended Deb Shops (Nasdaq: DEBS), a specialty retailer, in October at $12.00. Today, it's at $13.75, a 15% gain. With an enterprise-value-to-earnings multiple of less than four, I continue to believe it's significantly undervalued.

To summarize, had you invested $1,000 in each of my six stock "picks," your $6,000 would be worth $5,950, less than a 1% decline. Nothing to boast about -- and the recommendations were never meant to represent a portfolio -- but a market-beating performance nevertheless.

Stocks and sectors to avoid
My best advice was what to avoid or sell. In numerous columns, especially Valuation Matters (Feb. 2), Ulcer-Free Investing (April 17), Twelve Internet Myths (July 3), I warned investors about the perils of the market's hottest, most richly valued sectors. Since I wrote these columns, the Internet Holders Trust (Amex: HHH) -- a reasonable proxy for the stocks I was referring to -- has declined 73%, 63%, and 62%, respectively.

I was more specific in Perils and Prospects in Tech (Oct. 9) when I named six stocks that I thought were especially ripe for a fall: Cisco (Nasdaq: CSCO), Oracle (Nasdaq: ORCL), EMC (NYSE: EMC), Sun Microsystems (Nasdaq: SUNW), Nortel Networks (NYSE: NT), and Corning (NYSE: GLW). I received many hate emails for daring to question these sacred stocks, but in less than three months since then, they have fallen 26%, 6%, 24%, 41%, 48% and 38%, respectively -- an average of 30%. Now trading at an average of 38x next year's estimated earnings, these stocks are more reasonably priced, but I still do not believe that the risk-reward equation is highly favorable for any of them.

Follow the masters
The final piece of advice I'd like to leave you with this year is not to read my writings -- or anyone else's -- until you've absorbed the teachings of the investors with the best long-term track record ever: Warren Buffett and Charlie Munger. A good place to start is reading the transcript of my notes from the Berkshire Hathaway and Wesco (NYSE: WSC) annual meetings this year (click here and here). Then, go to the Berkshire Hathaway website, where you can read Warren Buffett's last 23 annual letters to his shareholders.

I look forward to continuing our dialogue next year. Happy New Year!

-- Whitney Tilson

Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous columns for The Motley Fool and other writings, click here.