Tuesday, March 24, 1998

Cash-King Portfolio Report
by Rob Landley

Alexandria, VA (Mar. 24, 1998) -- Good evening, Fools. Two things of note. First, the Cash-King Portfolio had a decent day, with Microsoft and Eastman Kodak up a buck each. And second, hey, there's an interview of me up on the Fool's website. It can be perused by clicking this link: Rob Landley in a Tux!

Ok, on to today's report...

The Art of War by Sun Tzu, styled now as a management handbook for the 1990s, has an interesting quote: "Victory can be discerned, but not manufactured." Warren Buffett presents a relevant analogy. He compares investing to a different sort of baseball game where there's no penalty for not swinging. On Buffett's baseball diamond, you can sit and wait -- as long as you want -- for the good pitches.

How are these ideas connected?

The trick to investing is finding good companies, yes; you've heard that before, and you'll hear it again. But stop for a second and think about what it means. Return to Sun Tzu who presents this major theme in The Art of War: In most endeavors understanding the big picture and being properly prepared is more important than performance during the actual event. Preparation and perspective determine the end.

This is especially true when it comes to investing. There's remarkably little that we, as individuals, can do to make any given stock go up or down once we've bought it. Unless you're a Wall Street analyst, regularly issuing Strong Buy, Hold, or Market-Perform ratings, you're not going to have any meaningful effect on the businesses that you invest in. Even though the Internet is giving us all more say about how our public corporations act in society, we are positioned primarily as observers when we invest. And that's good. The business has managers. We're charged with assessing their performance.

The important part, the part where we make the decision, the part where we directly control the performance of our portfolio, is during the process of selecting which stocks to buy, when to buy them, and how much cash to allocate to each one. To ascend to that level of mastery, we have to tighten our controls, narrow our filters, and understand what we're measuring when we buy stocks. But then, as generals, we've given our orders. The troops head out into the field, and all we can do if things go badly is to sound the horn, beat a hasty retreat, and sell our shares.

What we're trying to do here in the Cash-King portfolio (and in the Cash-King discussion area) is to find the best long-term investments we can make. We try to figure out what makes them so great. Then after buying some businesses, we try to determine if they're continuing to be as great (or greater) than when we bought them. And as time goes forward, we'll be assessing how great they are relative to our other finds. After all, as we're adding $2,000 every six months to this diversified portfolio, we'll just be looking for the best places to put our money at each different point in time.

Put another way: We're looking for the best of the best. Hey, it's pretty easy to find a business that has profits... because companies that aren't profitable tend not to survive very long. But simply being profitable isn't enough. Flat-line profitability for a business in the public markets is bad news, and even slight growth is unacceptable. Heck, in those instances, we'd prefer to just invest in government bonds and be guaranteed a profit. But a guaranteed profit -- tiny relative to inflation -- is not our aim. We'll leave that up to bearish financial journalists who don't think middle-class investors should be managing their own money.

For us, the minimum standard for comparison is an S&P 500 index fund or S&P Depositary Receipts trading on the AMEX, ticker symbol SPY. The historical annual returns from the S&P 500 have been 11%. We're trying to beat that long-term average, while we compare our results (in terms of the overall portfolio and individual investments) to the market each day, week, month, year, and decade (click the button to your right for today's numbers).

Now, ideally we want to beat the Foolish Four, which has trounced the market over the past three decades. And that's part of the reason we added this component to the Cash-King Portfolio as well. Finding companies that consistently outperform the market averages is hard enough; finding any that compete with a logical market-beating mechanical strategy is even more difficult. But we love to aim high. We love to search for phenomenal companies. And, in truth, the group of the best 1% of publicly traded stocks still leaves us with a hundred different public companies to choose from. And finding the best 10% of that best 1% is an exercise in pickiness of the highest order.

So far, we've only found a couple dozen companies that consistently execute on superior business models, with little or no debt and a clear focus on creating value for shareholders. It's not easy, and we'll always be looking. But the fact that we've found a screen of a few dozen may mean that we aren't being picky enough. We'll debate that in future reports, and in the message folder. Oh, and, I will let you in on a little secret. We've actually made two more of our final selections, but the process of writing up Buy Reports is getting in the way! We do feel, however, that the Buy Reports are a necessary part of the process.

So... we're waiting for the good pitches. We're improving our perspective and focusing on preparation. We do feel that we're ultimately headed towards victory. And I don't know about you, but I think that's a wonderful excuse for the truly remarkable sloth we've shown in publishing the Buy Reports!

What say you? Drop by the Cash-King message folder.

Fool on,

-Rob Landley


Stock  Change    Bid 
 CHV   -1 7/16  85.44 
 KO    +  3/16  76.00 
 EK    +1 1/8   64.38 
 XON   -  1/8   68.50 
 GM    +  11/16 70.50 
 INTC  -  5/8   74.38 
 MSFT  +1       84.88 
 PFE   -  7/8   95.25 
 TROW  -  3/8   70.50 
                  Day   Month    Year  History 
         C-K      -0.02%   1.21%   2.99%   2.99% 
         S&P:     +0.92%   5.37%  10.42%  10.42% 
         NASDAQ:  +1.11%   2.37%   9.65%   9.65% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     95.25    15.74% 
    2/27/98   27 Coca-Cola     69.11     76.00     9.97% 
    2/3/98    24 Microsoft     78.27     84.88     8.44% 
    3/12/98   20 Exxon         64.34     68.50     6.47% 
    2/6/98    28 T. Rowe Pr    67.35     70.50     4.68% 
    3/12/98   15 Chevron       83.34     85.44     2.51% 
    3/12/98   20 Eastman Ko    63.15     64.38     1.94% 
    3/12/98   17 General Mo    72.41     70.50    -2.63% 
    2/13/98   22 Intel         84.67     74.38   -12.16% 
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    22 Pfizer      1810.58   2095.50   $284.92 
    2/27/98   27 Coca-Cola   1865.89   2052.00   $186.11 
    2/3/98    24 Microsoft   1878.45   2037.00   $158.55 
    2/6/98    28 T. Rowe Pr  1885.70   1974.00    $88.30 
    3/12/98   20 Exxon       1286.70   1370.00    $83.30 
    3/12/98   15 Chevron     1250.14   1281.56    $31.42 
    3/12/98   20 Eastman Ko  1262.95   1287.50    $24.55 
    3/12/98   17 General Mo  1230.89   1198.50   -$32.39 
    2/13/98   22 Intel       1862.83   1636.25  -$226.58 
                               CASH   $5666.26 
                              TOTAL  $20598.57 
 *The year for the S&P and Nasdaq will be as of 02/03/98