Tuesday, March 03, 1998

Cash-King Portfolio Report
by Tom Gardner (tomg@fool.com)

ALEXANDRIA, VA (Mar. 3, 1998) -- I'm going to do an unusual thing today. I'm going to actually request that you forward this Cash-King portfolio report to anyone you know who is interested in saving money and investing. Even as the Internet is honing our public markets, bringing greater efficiency and equal access to information for all, Americans are still making some basic mistakes with their money. They are mistakes that can be easily corrected.

I offer you four simple reminders and then close with a performance review of the two portfolios that led up to the launching of our Cash-King site here. To the four points first...

1. Do not invest if you have debt at interest rates above 10%.

Sure, sure... the stock market has risen at a rate in excess of 30% per year over the last three years. But historically, common stock in the U.S. has returned an average of 11% yearly growth. I see no forces in the 21st century that should dramatically alter those returns for better or worse. And that means that, over time, investors cannot meaningfully beat double-digit interest rates on their debt. In fact, when you include 20-28% capital gains taxes on your investments, you should really be paying down all debts carrying rates above 8%, first.

Your bank isn't rooting for you to do this, but your bank probably isn't Foolish... yet.

2. Be very careful about fees paid to financial planners.

Fees for financial services today are moving around faster than a rubber ball under three spinning shells. There are front loads, back loads, 12b-1 fees. And there are hidden broker incentives. And there are firms taking a percentage of your total assets. Can you imagine dropping by fool.com only to find you had to pay 1% of your total savings just to enter our digital door? This cut of your assets is pretty attractive if you have just a few hundred bucks to invest, but it gets less attractive with every new dollar of your savings. How so? Well, a financial advisor who is taking 1% of your total assets is receiving $1 if you're investing $100, but $500 if you're investing $50,000, and -- get this -- $50,000 if you're investing $5 million.

The more money that you have to invest, the more unreasonable are these fees based on a percentage of your total assets. This is particularly true when an S&P index fund, that which tracks the overall returns of the 500 largest companies in America, charges you less than 0.25% of the cash you invest.

3. Avoid 91% of the mutual fund industry.

In the first two months of 1998, Americans invested over $32 billion into mutual funds, of which a fairly significant portion dropped into the 91% of managed mutual funds that have underperformed the market's average return in the 1990s. Buying managed mutual funds today in hopes that they'll beat the market is like betting on the Boston Red Sox to win the pennant. It hasn't happened for decades. It might happen once, but then how many more decades does a Fool have to wait before it happens again?

Managed funds are an even more unattractive option when you consider how actively traded many of them are and how that trading affects both them and you. For them, they get a tremendous amount of free research from brokerage firms in exchange for all those trades, which enables them to sound smart on CNBC and maybe even to launch an expensive newsletter or website. For you, it just means you get bitten by taxes each year. Mutual fund distributions are taxable, year after year. In essence, you're paying for your mutual fund to get free research en route to its consistent underperformance of the market.

It just doesn't make sense to us when there are index funds, Spiders, and then common stocks to buy and hold on your own.

4. Read five great books on your money.

A fourth Foolish step is just to read a handful of great books on your money. Books by Philip Fisher, Peter Lynch, Martin Fridson, and yes (sickening self-promotion) the Motley Fool. We poured heart and soul into our three books, and there isn't a single financial business that has invested so much time and money into educating individuals across the U.S. about their money. Heck, read our books and the others for free in the aisles of your local bookstore, or at your local public library, or pony up some cash and learn the fundamentals about your savings and the public markets.

A $75 investment in learning should return you tens of thousands of dollars in the years ahead. Every single American should make that investment, in books or books on tape. And, of course, there's nothing that the suits on the Street want you to do less than to educate yourself about your money.


Those four first steps could prove incredibly valuable for your family, friends, investment clubs, co-workers, and certainly your bosses! Please feel free to forward this report to any of them, either by e-mail or by printing and delivering it to them. This report is governed by our copyright, which restricts you from selling the report. But you may copy and deliver this for free to your million closest friends.

What would happen if everyone in America turned Foolish? We'd start directing our savings toward the businesses that best serve our needs -- from technology to health care, from media businesses to snack-food franchises. The end result would be a more efficient market designed around long-term business ownership, which would have our corporations inextricably linked as servants to society.

And small investors, 1) rather than being persuaded by a cadre of financial gooroos, 2) rather than relying on a national financial media that wants to make Internet education look dumb or crooked, 3) rather than speculating on short-term market movements, would buy & hold ownership positions in superior businesses for their future and their children's future and would try to learn more with the hundreds of thousands of others in their similar situation.

There are plenty of examples of these forces in action right here in Fooldom, but there's one right here in Cash-Kingdom. The media hasn't reported on it, nope. But what about the Simpleton and MoneyHeavy Portfolios that came before the launch of the Cash-King portfolio? They champion learning, and the idea of holding down the cost of commissions, and the reasons to eliminate yearly tax burdens outside of dividend payments, and the importance of knowing more and more about the business that one owns.

This whole section in Fooldom is dedicated to buying and holding for 10-year periods or longer. To make that point, I outlined two separate stock portfolios (in the summers of 1995 and 1997) and committed to not trade out of any positions for a ten-year period. Almost unthinkable. But the notions that underlie these portfolios are simple, practical, logical, and yet they do directly subvert so much of the coverage of and activity on Wall Street today.

Take a look at their performance relative to the S&P 500. Then consider the low-cost untaxed qualities of the portfolios. Then wonder aloud why the mutual fund industry gets so much ink and television time, while life here proceeds quietly along without coverage!

 The Simpleton Portfolio 
                         7/95       3/98 
                     Purchase    Present    Total 
 Company                Price      Price     Gain 
 Dell Computer          $8.03    $135.75   +1591% 
 America Online        $26.56    $117.63    +343% 
 Gap                   $11.59     $44.88    +287% 
 Sun Microsystems      $12.69     $45.75    +261% 
 Cisco Systems         $18.42     $65.25    +254% 
 Microsoft             $23.91     $83.38    +248% 
 Intel                 $34.13     $87.63    +157% 
 Hewlett-Packard       $39.94     $65.25     +63% 
 Texas Instruments     $35.47     $55.50     +56% 
 Silicon Graphics      $43.25     $15.00     -65% 
 TOTAL                    n/a        n/a  +319.5% 
 S&P 500                  556       1047   +88.3% 
 The Money-Heavy Portfolio 
         5/97       3/98 
                     Purchase    Present    Total 
 Company                Price      Price     Gain 
 Dell Computer         $55.19    $135.75  +146.0% 
 Gap                   $22.83     $44.88   +96.6% 
 Pioneer Hi-Bred       $69.63    $104.75   +50.4% 
 Cisco Systems         $44.50     $65.25   +46.6% 
 Microsoft             $62.94     $83.38   +32.5% 
 Johnson & John        $58.88     $74.75   +27.0% 
 Gillette              $87.75    $109.50   +24.8% 
 Intel                 $81.88     $87.63    +7.0% 
 Coca-Cola             $67.50     $67.50     0.0% 
 Oxford Health         $65.13     $17.13   -73.7% 
 Total Returns            n/a        n/a   +35.7% 
 S&P 500                            1047   +24.1% 

Cash-King investing doesn't have you paying an annual percentage of your total assets. It doesn't have you trading four times a week. It has you smiling at the numerous financial publications that have led with headlines this decade that encouraged individual investors to get out of their stock positions. Cash-King investing doesn't have you paying capital gains taxes at every turn. And, most importantly, it does demand that you gradually -- in the years ahead -- learn more about the companies in which you invest. That will have you reading and learning, yes, but we hope we've created an enjoyable, accessible, and free entry point for you here in Cash-Kingdom.

With that, I close by presenting the 11 Steps to Cash-King Investing for any of you who haven't read them yet. If you have any questions or opinions about this report, please feel free to drop them in the Cash-King Folder. And again, if you have friends or family with 401k plans, or in investment clubs, or who have been investing for years... please feel free to forward this report to them.

Fool on!

Tom Gardner


Stock  Change    Bid 
 KO    +  3/16  68.19 
 INTC  -2 5/16  85.25 
 MSFT  +1 3/16  84.44 
 PFE   -  13/16 87.00 
 TROW  +2 3/8   69.88 
                 Day   Month    Year  History 
         C-K      +0.15%  -0.21%   1.55%   1.55% 
         S&P:     +0.41%   0.26%   5.07%   5.07% 
         NASDAQ:  -0.09%  -0.75%   6.31%   6.31% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    24 Microsoft     78.27     84.44     7.88% 
    2/3/98    22 Pfizer        82.30     87.00     5.71% 
    2/6/98    28 T. Rowe Pr    67.35     69.88     3.75% 
    2/13/98   22 Intel         84.67     85.25     0.68% 
    2/27/98   27 Coca-Cola     69.11     68.19    -1.33% 
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    24 Microsoft   1878.45   2026.50   $148.05 
    2/3/98    22 Pfizer      1810.58   1914.00   $103.42 
    2/6/98    28 T. Rowe Pr  1885.70   1956.50    $70.80 
    2/13/98   22 Intel       1862.83   1875.50    $12.67 
    2/27/98   27 Coca-Cola   1865.89   1841.06   -$24.83 
                               CASH  $10696.94 
                              TOTAL  $20310.50 
 *The year for the S&P and Nasdaq will be as of 02/03/98