Boring Portfolio

Retrospective, Part II smallcaps continue to unravel

by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (Aug. 25, 1998) -- A morning rally largely fizzled out by the close of trading Tuesday, but the S&P 500 and Nasdaq Composite nevertheless managed to post gains of approximately 0.4%. The broader market is increasingly losing touch with the handful of blue-chip leaders, however. The Russell 2000 index fell a full 1.00% in value.

The Boring Portfolio's performance reflects the broader market reality: big-cap Cisco Systems (Nasdaq: CSCO) steamed ahead $15/16 to $103 15/16, even crossing the $105 mark briefly a establish new intra-day high; meanwhile, the small- and midcap issues that fill out the Borefolio continue to struggle, with losing issues outnumbering gainers in that group by four to three.

An absence of news of note on any Boring stocks provides an opportunity to continue the "Boring Retrospective" -- a brief survey of where we've been over the past three years or so, and where we are heading from here.

In Part 1, I described how I first stumbled upon The Motley Fool on America Online (NYSE: AOL), at a time when Fooldom was little more than an out-of-way folder tucked inside the AOL area devoted to investing miscellany. Along with me, a rapidly growing number of folks discovered back then that sharing ideas, opinions, and bad jokes in an online community was informative, thought-provoking, and just plain fun.

Part II of the Boring Retrospective begins with David and Tom Gardner describing what happened next. In their best-selling book, The Motley Fool Investment Guide, they wrote:

Within a few months, our little gabfest had grown into the most popular financial discussion on America Online. The company approached us about opening up an actual business on its service, where we could get paid for doing interactively on a daily basis many of the same things we were doing just once a month, noninteractively, with Ye Olde Printed Foole. Even better.

Throwing away printing and mailing costs forever, we went into the electronic publishing business.

I became more or less formally involved with The Motley Fool in 1995. Early that year I emailed a note to Tom, telling him how much I enjoyed Fooldom and expressing my interest in affiliating with the Fool somehow. In exchange for posting on a reasonably regular basis the stuff I was discovering in my stock research, might I become an "official" Fool (whatever that was)?

In his reply, Tom asked me what kinds of stocks I was most interested in. I answered that I often found myself researching stocks of companies that, although surprisingly profitable, tended to be overlooked by most individual investors: cement companies, manufactured home builders, tool-makers, and various other behind-the-scenes operators -- you know, boring stuff.

The Boring Portfolio

On April Fool's Day, 1995, I was officially dubbed "MF Boring." (Later, we all became TMFs, thus avoiding a certain double entendre.) I hung out at first in the "Low P/E Stocks" section of Fooldom, and soon thereafter began hosting an area devoted exclusively to Boring Stocks.

In the company of a small yet prolific subset of the Foolish community, I commenced discussing such firms as Gleason Corp. (NYSE: GLE), maker of automotive gear-making machinery; Texas Industries (NYSE: TXI), a company with one foot in the structural steel industry and the other foot in, well, cement; Park Electrochemical (NYSE: PKE), a firm located so far upstream in the electronics industry that its products are found in almost anything that runs on electricity; and American Woodmark (Nasdaq: AMWD), which makes many of the kitchen and bathroom cabinets you see for sale at Home Depot (NYSE: HD).

We informally assembled a hypothetical portfolio of some of our favorite stocks... and watched it perform surprisingly well in 1995. In fact, by the end of the year the folks at Fool HQ thought enough of our little experiment to invite me to take $50,000 of their money and invest it in a real-life Boring Portfolio. They proposed that I research companies, select stocks to buy for the portfolio, and write a nightly recap about what I was doing and what was happening in the world of Boring stocks.

I took them up on the offer, with the understanding that the Boring Portfolio would be strictly a part-time affair, operated by someone (viz., yours truly) not appreciably different from your typical individual investor -- except that all my trials and errors would occur right out in the open, for all to see and, we hoped, to profit from.

As with everything else in Fooldom, the point was (and is) not to holler out "Buy!!" and "Sell!!" recommendations. Rather, it was to engage interested readers in an ongoing, collaborative experience in which we would learn together about how to do investment research, how to interpret developments at the companies in which we'd invested, how to get answers to relevant questions we might have about our investments or prospective investments, and ultimately how to decide what to buy and what to sell.

The real-money Boring Portfolio was officially launched in January of 1996. From its outset, the Borefolio has favored buying stocks of high-quality companies that offer good prospects for above-average returns -- not exactly a controversial idea. It has also emphasized value, endeavoring to reflect the notion that within the universe of high-quality companies, it is better to buy their stocks when they're trading at reasonable prices rather than when they're expensive. Valuation, in turn, is based on calculations that take into account past and projected growth in per-share earnings (or, if you're up to it, free cash flow) and the interest rate environment.

Given the nature of the stock market in the last half of the 1990s, the Borefolio has been oriented primarily toward the lower end of the market capitalization continuum, because that is generally where the better values were to be found.

[To be continued...]

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

08/25/98 Close

Stock  Change    Bid 
 ANDW  +  3/8   15.81 
 CGO   +  3/16  32.75 
 BGP   -  5/8   24.00 
 CSL   -  1/8   44.25 
 CSCO  +  15/16 103.94 
 FCH   -  3/16  24.63 
 PNR   -  11/16 36.31 
 TBY   +  1/8   6.94 
                   Day   Month    Year  History 
         BORING   -0.15%  -6.19%  -6.01%  18.27% 
         S&P:     +0.43%  -2.49%  12.61%  75.80% 
         NASDAQ:  +0.39%  -3.98%  14.49%  72.71% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93    103.94   189.25% 
   2/28/96  400 Borders Gr    11.26     24.00   113.22% 
   8/13/96  200 Carlisle C    26.32     44.25    68.09% 
    3/5/97  150 Atlas Air     23.06     32.75    42.03% 
   4/14/98  100 Pentair       43.74     36.31   -16.99% 
   5/20/98  400 TCBY Enter    10.05      6.94   -30.94% 
   11/6/97  200 FelCor Sui    37.59     24.63   -34.49% 
   1/21/98  200 Andrew Cor    26.09     15.81   -39.39% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  15590.63 $10200.64 
   2/28/96  400 Borders Gr  4502.49   9600.00  $5097.51 
   8/13/96  200 Carlisle C  5264.99   8850.00  $3585.01 
    3/5/97  150 Atlas Air   3458.74   4912.50  $1453.76 
   4/14/98  100 Pentair     4374.25   3631.25  -$743.00 
   5/20/98  400 TCBY Enter  4018.00   2775.00 -$1243.00 
   1/21/98  200 Andrew Cor  5218.00   3162.50 -$2055.50 
   11/6/97  200 FelCor Sui  7518.00   4925.00 -$2593.00 
                              CASH   $5686.93 
                             TOTAL  $59133.81