Tuesday, May 12, 1998
by Tom Gardner
Alexandria, VA (May 12, 1998) -- Have you heard them, Fool? They keep saying what they've always said, framed in a question. "Will it all end badly?" the Wise ask. Will that inevitable fall in the value of our stock market -- perhaps sudden, perhaps ferocious -- bring average investors to their knees, reducing them to a tiny pool of tears and a small voice whimpering for help from that dear, half-forgotten financial professional?
You know, that's largely the financial media's position today on the 1990s revolution of the individual investor in America. Much of the financial press still diligently supports the notion that only the professionals should be managing America's money and only the big-city media should be covering the markets.
Yep, everywhere around us the Fool is ever being asked, "Will it all end badly?"
Will it all end badly for those average investors reckless enough to attempt the management of their own money. And what will happen when their Douglas Fairbanks swordplay against the financial markets lands them inebriated in a ditch, having lost every nickel of savings trying to invest without a financial consultant.
"Don't do it. You can't do it," the Wise tell us. "You'll lose it all. Don't even try."
It isn't the cynicism of that message that I find distasteful (though, there are better foods). No, it is that it's irresponsible. Here's how: Even today, much of the financial media casually steers individuals to professionals without clearly reporting on how those professionals are compensated. And look what that hath wrought in America:
a. The average household, heavily solicited by our nation's banks, now carries more than $7,000 in credit-card debt, running at extortionate average interest rates that will top 19% by year end.
b. The average American hasn't a clue yet that the simple index fund has beaten between 80-90% of all managed equity funds over the past two decades, while charging on average 80% less in fees than managed funds do each year. (These figures don't even include the higher tax hits that travel with managed funds.)
c. Americans are only just learning how full-service brokers are compensated and have been for the past few decades. It's a model that consistently pits transaction rewards for the pro against the best interests of the customer.
d. The growth rate of individuals looking for personal finance information and analysis online is rising at a phenomenal rate. There's something that people don't like about the "service" they've been getting for years. From corporate executives to retirees, from students to even Hollywood directors, the rush is online into Foolish environs where millions of individuals can share objectivethought and thorough research.
With that as a lead-in, I'd like to share the performance of the two ten-stock portfolios that preceded the birth of the Cash-King portfolio. Why? Because they are simple models based on common-sense principles that directly subvert age-old practices on Wall Street. They remind me of Nobel Prize winning writer Isaac Bashevis Singer and his complaint about modern poetry: "For some curious reason, many of our contemporary poets and literary critics continue to believe that genius lives in obscurity. Contrary to their findings, I have always found truth in simplicity."
All the information that it took to find these Cash-King investments and to build this portfolio is available for free in our 11 Steps to Cash-King Investing. It is also openly discussed on the Cash-King message folder on our website and on AOL (though more actively on our website). And much of this work, with new findings, will be featured in our next book, due out at the end of this year.
In the meantime, let me just restate a few of the core principles of the Cash-King model before posting the updated results of its parent portfolios. Here are the basics:
1) Hey, we don't like to rack up heavy costs when investing -- so we don't trade frequently and we don't pay capital gains taxes.
2) We refuse to rely on other people's investment picks -- even our Aunt Sal when she's on a hot streak -- without doing our own research. That said, we don't expect to spend more than three hours a month on our investments.
3) We don't invest in companies with which we have no familiarity. For instance, we expect never to hold any positions in companies offered on the Vancouver Stock Exchange. The lottery may proffer better returns... we're still running the numbers.
4) We concentrate our attention on businesses with broad and ascending margins, a strong position in a growing industry, and the operational cash to fund future expansion. That all sounds sophisticated, but it's simple enough.
5) We might be accused of falling in love with our stocks, but only because we enjoy learning more about them and only because they're the sort of spouses that have rewarded the faithful with riches (monetary and non-monetary) beyond measure for centuries running.
6) We believe (perhaps arrogantly) that the basic underlying philosophy of our approach should be taught to everyone before they graduate high school. Learning about obscure characters in Czarist Russia is a good deal of fun, but practical learning has its merits too.
Ok, here are the performances of the Simpleton and Money-Heavy Portfolios, first posted in July 1995 and May 1997, respectively. These two portfolios are the precursors to out current Cash-King portfolio. If you have any questions or comments about these portfolios, we'll be answering to all comers in the Cash-King message folder this evening.
1. The Simpleton Portfolio
7/95 5/98 Purchase Present Total Company Price Price Gain Dell Computer $4.02 $91.00 +2164% America Online $13.28 $86.25 +549% Gap $11.58 $52.50 +353% Cisco Systems $18.42 $75.00 +307% Microsoft $23.91 $83.75 +250% Sun Micro $12.69 $41.00 +223% Intel $34.13 $82.75 +142% Hewlett Pack. $39.94 $77.25 +93% Texas Inst. $35.47 $62.00 +75% Sili Graphics $43.25 $12.75 -71% Total Returns Simpleton n/a n/a +408.5% S&P 500 556 1103 +98.4% Annualized Returns Simpleton +78% S&P 500 +27%
(Peekaboo! Hi ho there, Mark Hulbert. Hi there, Forbes Magazine! You guys forgot to call and get some facts before writing. Does Forbes still have editors?)
2. The Money-Heavy Portfolio
5/97 5/98 Purchase Present Total Company Price Price Gain Dell Computer $27.60 $91.00 +230% Gap $22.83 $52.50 +130% Pioneer Hi-Bred $23.21 $39.50 +70% Cisco Systems $44.50 $75.00 +69% Microsoft $62.94 $83.75 +33% Gillette $87.75 $115.25 +31% Johnson & John $58.88 $70.25 +19% Coca-Cola $67.50 $77.25 +14% Intel $81.88 $82.75 +1% Oxford Health $65.13 $19.00 -71% Total Returns n/a n/a +52.6% S&P 500 844 1103 +30.7% Total Returns Money-Heavy n/a n/a +52.6% S&P 500 556 1103 +30.7% Annualized Returns Money-Heavy +53% S&P 500 +31%
(Peekaboo, hi there Joe
Nocera and Fortune Magazine. Has it all ended badly yet? Or do you
think that middle-class investors in America -- all classes, in fact -- may
actually be smart enough to invest for decades to come in the best performing
vehicle available: index funds and common
To close, I would remind readers that what we've achieved to date in Fooldom isn't extraordinary. Not at all. The principles are grounded in fifth-grade mathematics and simple logic. In fact, they are ideas that will only grow more popular once the financial industry rewrites its compensation guidelines, embraces flat-fee annual service, and works with its customers to beat or meet market average returns alongside methodical savings.
No the market won't grow at 20-25% per year in the decades ahead. But 9-12% annual growth, certainly. And we're investing to beat that. Hey, we might not continue to beat the market. But we'll sure have fun, and learn a lot, trying.
Tom Gardner, Fool
Stock Change Bid ---------------- CHV - 11/16 84.31 KO + 5/16 77.75 GPS + 1/16 53.25 EK - 7/8 71.06 XON + 7/8 73.81 GM +1 15/16 73.13 INTC +2 84.50 MSFT +1 3/8 85.63 PFE + 7/8 111.88 TROW + 3/8 36.25
Day Month Year History C-K +0.70% 0.45% 8.95% 8.95% S&P: +0.83% 0.36% 11.44% 11.44% NASDAQ: +0.65% -0.44% 12.54% 12.54% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 111.88 35.94% 2/27/98 27 Coca-Cola 69.11 77.75 12.51% 2/3/98 24 Microsoft 78.27 85.63 9.40% 2/6/98 56 T. Rowe Pr 33.67 36.25 7.65% 5/1/98 37 Gap Inc. 51.09 53.25 4.23% 2/13/98 22 Intel 84.67 84.50 -0.21% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 73.81 14.73% 3/12/98 20 Eastman Ko 63.15 71.06 12.53% 3/12/98 15 Chevron 83.34 84.31 1.16% 3/12/98 17 General Mo 72.41 73.13 0.99% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 2461.25 $650.67 2/27/98 27 Coca-Cola 1865.89 2099.25 $233.36 2/3/98 24 Microsoft 1878.45 2055.00 $176.55 2/6/98 56 T. Rowe Pr 1885.70 2030.00 $144.30 5/1/98 37 Gap Inc. 1890.33 1970.25 $79.92 2/13/98 22 Intel 1862.83 1859.00 -$3.83 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1476.25 $189.55 3/12/98 20 Eastman Ko 1262.95 1421.25 $158.30 3/12/98 15 Chevron 1250.14 1264.69 $14.55 3/12/98 17 General Mo 1230.89 1243.13 $12.23 CASH $3910.83 TOTAL $21790.89 *The year for the S&P and Nasdaq will be as of 02/03/98