Boring Portfolio

Inappropriate Relationship? ...with small-cap stocks?
by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (Aug. 17, 1998) -- The benchmark S&P 500 and Nasdaq indices rose sharply Monday, as the lure of bargains among beaten-down stocks appeared to outweigh concerns about the Presidential inquisition being conducted this afternoon in Washington. The S&P 500 soared nearly 2% in value, while the Nasdaq gained more than 1.5%.

As usual, smaller stocks largely watched from the sidelines, with the Russell 2000 rising a modest 0.29%.

The Boring Portfolio posted a decent 1.46% gain, as shares of Borders Group (NYSE: BGP) rebounded $1 5/8 to $26 3/8 in active trading after being clobbered last week, and Cisco Systems (Nasdaq: CSCO) gained $1 11/16 to $98 1/8 on news that the company will launch a major advertising campaign to promote the brand.

As I write this, no word has leaked out about what President Clinton may have said in his testimony before the grand jury today. Regardless of their sentiments about the President, however, investors everywhere are surely wondering, "Is the Boring Portfolio guilty of having an inappropriate relationship with small-cap stocks?"

That is, has the Boring Portfolio been overly distracted by the enticing valuations and exciting growth potential of certain relatively unknown, low-level issues? Has it neglected the financial benefits of sticking with big-cap stocks?

Perhaps so. Of course, small- and mid-cap stocks have historically outperformed large caps over the long run. Furthermore, many smaller stocks (including all of them in the Boring Portfolio) offer better earnings growth possibilities than the S&P 500 and at better prices -- as based on stock prices relative to projected earnings, discounted estimated future cash flows, or most any other criterion of value.

That said, the ultimate purpose of investing is to not to make a point but to make money. And if funds are flowing relentlessly into the more liquid large-caps, perhaps it is imprudent to persist in paddling against the current.

Truth be told, I have long wanted to add some blue-chip ballast to our wee Boring boat. But a congenital aversion to overpaying for anything has precluded doing so for about the past year, as nearly all of the large-cap stocks -- and the indexes they comprise -- traded at historically high valuations.

There is much to be said for the argument that purchasing shares of high quality companies pretty much regardless of the price they happen to be trading at will serve you very well over the long haul -- and that is particularly true if you are still playing on the front half of life's golf course. As one moves into the back nine, however -- or at least as I've moved into the back nine -- they become somewhat more cautious about matters of price, or, more precisely, value.

I admit it. Guilty as charged.

Happily, blue chip stocks have corrected considerably in recent weeks. Yes, happily. After all, value-oriented investors can only be encouraged when high-quality stocks go on sale.

Perhaps it's time for some Fools to go shopping?

FoolWatch -- It's what's going on at the Fool today.


08/17/98 Close

Stock  Change    Bid 
 ANDW  -  1/8   15.75 
 CGO   -  1/8   34.44 
 BGP   +1 5/8   26.38 
 CSL   +  3/8   43.94 
 CSCO  +1 11/16 98.13 
 FCH   -  3/8   24.25 
 PNR   +  1/4   37.06 
 TBY   -  1/16  7.81 
 
                   Day   Month    Year  History 
         BORING   +1.46%  -5.23%  -5.05%  19.48% 
         S&P:     +1.97%  -3.30%  11.67%  74.33% 
         NASDAQ:  +1.56%  -2.90%  15.77%  74.65% 
  
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     98.13   173.08% 
   2/28/96  400 Borders Gr    11.26     26.38   134.31% 
   8/13/96  200 Carlisle C    26.32     43.94    66.90% 
    3/5/97  150 Atlas Air     23.06     34.44    49.35% 
   4/14/98  100 Pentair       43.74     37.06   -15.27% 
   5/20/98  400 TCBY Enter    10.05      7.81   -22.22% 
   11/6/97  200 FelCor Sui    37.59     24.25   -35.49% 
   1/21/98  200 Andrew Cor    26.09     15.75   -39.63% 
  
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14718.75  $9328.76 
   2/28/96  400 Borders Gr  4502.49  10550.00  $6047.51 
   8/13/96  200 Carlisle C  5264.99   8787.50  $3522.51 
    3/5/97  150 Atlas Air   3458.74   5165.63  $1706.89 
   4/14/98  100 Pentair     4374.25   3706.25  -$668.00 
   5/20/98  400 TCBY Enter  4018.00   3125.00  -$893.00 
   1/21/98  200 Andrew Cor  5218.00   3150.00 -$2068.00 
   11/6/97  200 FelCor Sui  7518.00   4850.00 -$2668.00 
  
                              CASH   $5686.93 
                             TOTAL  $59740.06 
 

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