Boring Portfolio

Lessons from 1987
...did you sell at the bottom?

by Mark Weaver (MWEAV)

SPRINGFIELD, IL (Aug. 27, 1998) -- Well, in the words of the Church Lady, wasn't that special! Markets worldwide imploded on news of a continued meltdown of the Russian economy and instability in Russia's political situation as well. It isn't pretty. Fully 26% of stocks on the NYSE are trading at new 52-week lows. Over 950 million shares traded today, with down volume swamping up volume on a 10:1 ratio.

On the day, the S&P 500 plunged 3.79%, the Nasdaq was dumped for a 4.62% loss and our favorite lagging index the Russell 2000 fell a bit less, off 3.77%. The Borefolio continued its descent as well, dropping 4.25%.

There was no news of significance on any of our holdings.

FelCor Lodging Trust (NYSE: FCH) fell $1 1/8 today. The stock now yields 8.9%. Impressive. I was also impressed that the volume on FelCor's drop was actually a bit below its average daily volume. This smacks of a lack of buyers more than a rush to the exits. Hey FelCor!!! How about buying back a few of those shares? At this point the total return on the shares might beat buying new properties.

How about Borders Group (NYSE: BGP)? Here's a company that is well managed, is growing at a steady 25% per year clip and actually met estimates in its recently released earnings report. This stock is selling at a historically low PE ratio, price/sales ratio and price/cash flow ratio. It has never been cheaper by any of these criteria since the company came public.

Markets like the one we had today create opportunity. As I mentioned a couple of weeks ago, once I find a company I like, there is no reason to dismay because the stock looks too expensive. The market will always give investors opportunities to buy "on the cheap." Broad market declines create the greatest opportunity because the good go right down with the bad.

When good companies drop in price based on company specific news an investor has to re-evaluate the stock. When prices fall just because prices are falling, the prepared investor can pick up bargains. Some bargains were created today. I suspect there will be a few more created before things turn around, but turn around they will. With interest rates low (and, given the worldwide problems, likely headed lower) the chances for a major bear market are lower than if rates were rising. Inflation is well under control. The CRB index of commodity prices is trading at levels not seen since the late 1980s. Deflation seems to be the bigger risk.

Greg has been giving a very interesting retrospective this week and it will continue tomorrow. I was tempted to throw in a bit of my past experience but I will save it for another time. One part of my past I did want to share was my experience in October of 1987 -- the last stock market "crash." While Greg turned his attention to stocks in the early 90s, I started investing back in 1982. In fact, I made my first stock purchase about two weeks before the August 1982 stock market low. Yep, I've been there for the whole bull market and was an avid investor at the time of the crash.

The main lesson I learned from the '87 crash was that the investors who lost the most were those that sold stocks at the bottom. The temptation is great to sell when the market has had a precipitous drop. Whatever you do, don't sell your stocks at bargain prices to other investors who are waiting for a chance to pick up those shares on the cheap.

If you learn nothing else from the Borefolio, remember that valuation matters and ultimately stocks will trade at their intrinsic value. An investor should always have a sense of the intrinsic worth of the stocks they hold. That knowledge is a comfort on days like this. If you haven't paid attention to the value of your stocks, tonight might be a good time to take a look. There is a good resource for valuation right here at the Motley Fool. You might want to click here.

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

08/27/98 Close

Stock  Change    Bid 
 ANDW  -1 1/8   14.50 
 CGO   -2 1/2   28.88 
 BGP   -  13/16 21.31 
 CSL   -1 15/16 41.13 
 CSCO  -4 1/2   99.13 
 FCH   -1 1/8   23.00 
 PNR   -1 1/8   33.75 
 TBY   -  5/16  6.56 
                   Day   Month    Year  History 
         BORING   -4.25% -12.53% -12.36%  10.27% 
         S&P:     -3.79%  -6.92%   7.49%  67.80% 
         NASDAQ:  -4.62%  -9.93%   7.39%  62.00% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     99.13   175.86% 
   2/28/96  400 Borders Gr    11.26     21.31    89.34% 
   8/13/96  200 Carlisle C    26.32     41.13    56.22% 
    3/5/97  150 Atlas Air     23.06     28.88    25.23% 
   4/14/98  100 Pentair       43.74     33.75   -22.84% 
   5/20/98  400 TCBY Enter    10.05      6.56   -34.67% 
   11/6/97  200 FelCor Sui    37.59     23.00   -38.81% 
   1/21/98  200 Andrew Cor    26.09     14.50   -44.42% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14868.75  $9478.76 
   2/28/96  400 Borders Gr  4502.49   8525.00  $4022.51 
   8/13/96  200 Carlisle C  5264.99   8225.00  $2960.01 
    3/5/97  150 Atlas Air   3458.74   4331.25   $872.51 
   4/14/98  100 Pentair     4374.25   3375.00  -$999.25 
   5/20/98  400 TCBY Enter  4018.00   2625.00 -$1393.00 
   1/21/98  200 Andrew Cor  5218.00   2900.00 -$2318.00 
   11/6/97  200 FelCor Sui  7518.00   4600.00 -$2918.00 
                              CASH   $5686.93 
                             TOTAL  $55136.93