Wednesday, February 18, 1998

Cash-King Portfolio Report
by Al Levit ([email protected])

TOWACO, NJ (Feb. 18, 1998) -- Ok, it’s Wednesday, and that makes it Q&A time for questions from the Cash-King message board. Today we're going to concentrate on just one post, from Web Fool "Scammer," who dropped by from AOL to write:

"I have a $13,000 Portfolio. $8,000 is already invested in Foolish Four stocks. I made those buys before I discovered the Cash-King concept. So I now have $5,000 to invest in CK stocks.

"The CK Portfolio says to divide capital evenly and to buy shares in 10-20 stocks to hold for 10 years. But if I do that, it'll mean buying $500 worth of stock in 10 different companies. And with prices between $40 and $150 per share I would only be able to buy 5-10 shares of any one company. So, guys, my question has two parts:

1) Is it worth it to buy such a small lot of shares?
2) Am I better off picking 2-4 of the best CK Stocks I find?"

These are excellent questions, Scammer, because they bring up several interesting points, including:

1. Our belief in the importance of combining the Foolish Four with Cash-King investments in a balanced portfolio.

2. The allocation between Cash-King and Fool Four holdings.

3. The ideal number of stocks in a Foolish Portfolio.

4. The minimum number of shares of any stock that one should purchase.

5. The importance of minimizing transaction costs for small portfolios.

Pretty neat for Scammer to get all that into one post! Let's take them one by one:

1. Tom will cover Scammer’s first point in much more detail when he writes the Fool-Four Buy Report later this month. For now, let me just say the single most frequent criticism we hear on the Cash-King message board about our method is our lack of attention to valuation. I won't address that right now (I want to save that for Friday), except to mention that we think the value-orientation of the Foolish Four (or one of its Dow-Dividend brethren) makes a perfect complement to the pure growth-oriented Cash-King philosophy.

2. As far as stocks and allocation are concerned, first, a little quibble. We normally feel that an entire portfolio need only house 12-15 stocks. Our Cash-King component at the outset will tote up to 8 stocks. We'll hold 8 CK stocks, 4 Fool-Four stocks, and we'll be awaiting the next $2,000 of our savings to roll through after six months from our launch. Ultimately, we cannot ever see ourselves holding more than 18-20 stocks, no matter how large this portfolio grows.

3. Moving on to allocation, in Step 3 of our 11 Steps, Phil Weiss notes that our Foolish-Four holdings will typically add up to 20%-30% of the total portfolio. At the launch, 25% of our $20,000 (or $5,000) is going toward Foolish-Four investments. In Scammer’s case, the percentage is much higher. He has eight of his thirteen-thousand bucks in Fool-Four positions. However, Scammer has just become familiar with Cash-King investing. So, there's no rush to rebalance anything. We expect that Scammer will be adding more money each month, each year for decades to come. Thus, he can reallocate gradually, if he'd like to boost his exposure to growth stocks.

4. In his note, Scammer expressed some concern about holding a small number of shares in any investment. Two shares here, ten there, five there, sixteen here -- what gives? Tom addressed this point in his column a couple of weeks ago (Q&A Wednesday, 2/4/98) when he pointed out that what matters is the value of your shares, not their number. Fools, would you rather have 5 shares of Berkshire Hathaway (NYSE:BRK.A) or 2.5 million shares of Whiskey Creek Resources (VSE: 3vWCK)? The 5 Berkshire shares are valued at $274,000 and overseen by one of the great business minds of our time. The 2.5 million Whiskey Creek shares are valued at $175,000 and managed by.,. uh... uhhh... uhhhhh (Fool lawyers step in and restrict me from making a joke about the Vancouver Stock Exchange here!).

Now please be aware that there are still some full-service brokers out there that will tell you that you should be trading in "round lots" (minimum of 100 shares) to save transaction costs. If you ever hear this, turn around and don’t look back, because that's old-line thinking. All of the discount brokers that Fools prefer charge set commissions based on each trade, regardless of the number of shares bought or sold.

5. Beyond share totals and allocation, Scammer, you should be very concerned about your overall commission costs. With a portfolio of this size, try to keep them down to 1%/year of the total portfolio, with 2% as an absolute maximum. Once you've built your portfolio up to a million bucks (hey, it'll happen if you're patient), your commissions should be toting up to less than 0.04% of the total. That's 20 trades at $20 per trade, or $400. Divide $400 by $1 million, and you come up with 0.04%. And you shouldn't even be making 20 trades per year! Ideally, Fool, you might make four buys each year, by adding new money every three months. And then you wouldn't trade again all year. 4 buys at $10 per trade equals $40... no matter how big your portfolio is!

In your present situation, Scammer, you should spend no more than $100 in commissions on the $5,000 you're dedicating to CK stocks. If commissions are $10 a trade (which is even high these days) you can make up to ten trades with that money. We'd suggest 5 trades, $50 in commissions, or 1% of the $5,000 you have to invest. And finally, hey Scam, congratulations. 70% of America is carrying high-rate credit card debt and shouldn't be investing in stocks. With your $13,000 saved, you're well ahead of the game and in front of the eight ball. Nice job.

I'd like to close today with a note on our CK Web board that deserves more public exposure! It comes from "Caveguy" and offers this:

"Reading all this Cash-King info has changed my perception. Normally when I walked into a McDonalds, I'd see over-priced greasy fast food. But most recently when I went, I saw stocks -- MCD, Coca-Cola (NYSE: KO) cans, and Disney (NYSE:DIS) via their Hercules advertisement. For the first time, I was looking at the business as a business rather than as a fast-food joint. And I was amazed at how these companies lock onto one another to boost their profits. A good comparison would be Microsoft working with Intel and Compaq or Dell. I'll scrub your back, you scrub mine, and we’ll bathe in the cash!"

Well said, Caveguy, and thanks for finishing our Q&A this week. I’ll be back tomorrow with a look at how this Cash-King investor feels about ethics in his investing. How do you feel?

Until then, see you on the message board,

Al Levit ([email protected])

TODAY'S NUMBERS

Stock  Change    Bid 
 ---------------- 
 INTC  +2 3/16  86.88 
 MSFT  +  1/4   154.56 
 PFE   +1 13/16 86.31 
 TROW  +  1/8   66.88 
 
                   Day   Month    Year  History 
         C-K      +0.47%   0.50%   0.50%   0.50% 
         S&P:     +0.91%   3.07%   3.07%   3.07% 
         NASDAQ:  +0.72%   3.80%   3.80%   3.80% 
  
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     86.31     4.88% 
      35839   22 Intel         84.67     86.88     2.60% 
    2/6/98    28 T. Rowe Pr    67.35     66.88    -0.70% 
    2/3/98    12 Microsoft    156.54    154.56    -1.26% 
  
  
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    22 Pfizer      1810.58   1898.88    $88.30 
    2/13/98   22 Intel       1862.83   1911.25    $48.42 
    2/6/98    28 T. Rowe Pr  1885.70   1872.50   -$13.20 
    2/3/98    12 Microsoft   1878.45   1854.75   -$23.70 
  
                               CASH  $12562.83 
                              TOTAL  $20100.21 
  
 *The year for the S&P and Nasdaq will be as of 02/03/98