Friday, May 15, 1998

Cash-King Portfolio Report
by Tom Gardner

Alexandria, VA (May 15, 1998) -- For some of you, today's financial lesson (reserved for every Friday here in CK-land) will be a statement of the obvious, a return to something learned years or months ago. But for others, and notably for some in the national financial media, this lesson is either a much-needed reminder or a useful first look at the material.

Today, I'd like to talk about the long-term performance of the market for common stocks in America, and around the industrialized world. In the 20th century, the U.S. stock market has risen at a rate of 11% per year. I just returned from a business trip to the U.K., and their market (as measured by the Footsie Index) has risen at a rate of 12.2% per year this century. In fact, the Footsie's gains have ranged up to 13.5% per annum since Great Britain dug its way out of the rubble of World War II fifty years ago.

If you study market performance in the other industrialized nations, you're going to find average annual returns of between 9-14% over the 20th century. And what this means is that, on average, the stock markets of the world are forever going to be hitting new highs. On average, that is -- not every single year. Next year, the U.S. market may fall 6%. Then 8% the year after that. But looking out in decades, the world's public markets are appreciating vehicles.

It's a lot like the human condition that, in monetary and non-monetary terms, on average is ever on the up and up (that's my British influence for today). I still remember listening to Spike Lee artfully convince a Brown University undergraduate of this point at a debate in Providence in the late 1980s.

Things are subtly improving.

Contrarily, it's very easy to turn pessimistic about the human state and about living (and, by extension, about our public markets). And it's intellectually satisfying. If you do, you're smarter than the rest of the world because you're disappointed by its apparent direction, its ignorance of faith, its simplicity. But though it may be easy to be negative (and sound smart), it's a position that is unsupported by reality, contestable with simple numerics.

The human condition, on average, improves inchmeal each year.

If you don't agree, take your time machine back to 1919, to the influenza pandemic from which over 25 million people perished. In less than two years, the airborne virus reduced the average lifespan of an American by 10 years -- while dropping that of tens of thousands to a matter of minutes. Scientific thinking had not fully penetrated medicine; there was yet no vaccine for influenza.

Then zip back another twenty years to the turn of the century, where you'll find the streets of New York City heaped with enough horse manure to form a block of it two football fields long and one football field high. Technology, efficiency, cleanliness, and popular demand -- they were not happy bedfellows.

Then, for the heck of it, let's dart back a few centuries and live for a week as serfs in 12th century France. We'd sworn fealty to our lord, humbly agreeing never to leave our small plot of land without his permission, never to marry or start a family without his license, and always to turn the majority of our crop yield over to him for sale. We had few defensible rights as individuals.

It's as plain as the beautiful day outside my window: The human condition, on average, improves inchmeal each year -- with advances in technology, medicine, public policy, et cetera. No, we don't improve every year, or every hour of every year. But gradually, on average, life gets better.

The same is true of our public markets.

What our public markets have not achieved, though, is 20th century growth rates that would on average double values every four years. In the U.S., over the past five years, that's exactly what's happened. Our stock market has risen at a rate of 20% per year since the summer of 1993. That's 9 percentage points above the average in each of the past five years.

It's not going to continue for years to come. It can't continue. And no matter what a financial magazine reporter or newspaper writer or television anchor says that the Motley Fool told you (we're still scratching our heads over a few articles, can't ya tell...), I'd like to make our position very clear:

"We do not expect the stock market to rise at a rate of 20% per year, indefinitely. We do, however, expect periods of 20-30% declines over the next 20 years, and 20-30% inclines. For this reason, we don't borrow money to buy stocks; we don't invest any money that we'll need in cash within five years; and we also don't put our long-term savings anywhere but in the stock market."

Now what do we expect from the U.S. stock market?

Well, around 11% annual growth over the next 20 years. With the S&P 500 at 1115 today, that would mean that in the year 2018, the index would sit somewhere around 9000. Over that time, the Dow Jones Industrials -- which are sitting near 9170 today -- would rise to about 74,000. In each case, indexing investors would have made 8 times their initial investment. If they invested $10,000 in the index fund today, they could expect to have about $80,000 there in the year 2018.

While there are no guarantees, the historical evidence suggests these are reasonable expectations. It's also entirely reasonable to expect that a professional managing your money -- taking cuts for every trade or with her eye first attending total assets under management not market outperformance -- will return you less than that market average. History suggests as much.

Unfortunately, the national financial media isn't concentrated yet on long-term market performance nor on the negative effects of compensation systems that reward short-term thinking on Wall Street. Some of our financial reporters don't have the context or the capacity or the freedom to explain an investment philosophy that both doesn't care if the market falls 25% in the next six hours or six months and doesn't believe that active professional management without scrutiny is a net gain for individuals. For that reason, some financial reporters -- certainly not all -- cannot yet accurately report on what we're all doing here at the Motley Fool each day.

And that's... all right. Because, in the end, our service online, in newspapers and books, and on the radio in a few weeks is not built to make the financial press happy. We're trying to be servants of America, for you and with you. That fits the spirit of my high school prescript: Cui servire est regnare. To serve is perfect freedom. To serve is to rule.

We happen to think there's great value in service to common Fools across the country who, like us and you, received no basic financial education in school and heretofore were subject to an often fortune-hunting concentration on the short-term in the media and on Wall Street. We were beholden to a message that promoted that someday soon it might all end badly and that without professional help, we'd probably all end badly with it.

That's been a pretty expensive message for individuals. The historical results prove that out.

If the next hundred years look anything like the past hundred, then low-cost indexing in the U.S. market will provide extremely healthy returns (certainly far better than state-run lotteries). It may sound preposterous, but the S&P 500 Index appears headed to 37,981,555 by the year 2098. And the Dow Jones Industrials are bound for 312 million. I won't be around to see it, but those levels will result from nothing more nor less than 11% annual growth for the century. And even if the market only proffers 9.5% annual growth over the next century, that makes for an S&P 500 Index trading at 9,742,867 and a Dow over 80 million by 2098. A pretty nice investment.

We happen to think we can beat those returns by learning about individual businesses, like Coca-Cola, Microsoft, Pfizer, Gap, and others here in the Cash-King portfolio. We also believe there are intellectual and social rewards to tracking the growth of our investments and the progress of our businesses. And while we do expect to beat the market over time, we make no guarantees to ourselves of it. Learning will improve our chances, though.

Now I wonder if in 2099 the financial professional and pundit will still be worrying that the market might fall 15% in the next year and promoting the idea that individuals and investment clubs should never try this on their own.

Hopefully, my ancestors and yours -- driving Mach-4 Space Dragsters and comfortably living to age 140 then -- will know to just methodically add more savings to investment, to buy and hold common stocks (or passive index funds), to become a part-owner in the businesses that make up our world, and by extension to have some say in the way that world works.

Sounds better than serfdom to me.

Have a great weekend,



Stock  Change    Bid 
 CHV   -  7/8   85.00 
 KO    -  7/8   76.88 
 GPS   -1 7/16  52.56 
 EK    -  15/16 69.63 
 XON   -  1/16  73.69 
 GM    -1 3/16  73.88 
 INTC  -4 1/4   80.25 
 MSFT  +  1/2   89.38 
 PFE   -3 3/4   104.50 
 TROW  -1 3/8   34.00 
                  Day   Month    Year  History 
         C-K      -1.70%  -1.16%   7.21%   7.21% 
         S&P:     -0.77%  -0.27%  10.73%  10.73% 
         NASDAQ:  -1.00%  -1.16%  11.73%  11.73% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   22 Pfizer        82.30    104.50    26.98% 
     2/3/98   24 Microsoft     78.27     89.38    14.19% 
    2/27/98   27 Coca-Cola     69.11     76.88    11.24% 
     5/1/98   37 Gap Inc.      51.09     52.56     2.88% 
     2/6/98   56 T. Rowe Pr    33.67     34.00     0.97% 
    2/13/98   22 Intel         84.67     80.25    -5.22% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Exxon         64.34     73.69    14.54% 
    3/12/98   20 Eastman Ko    63.15     69.63    10.26% 
    3/12/98   17 General Mo    72.41     73.88     2.03% 
    3/12/98   15 Chevron       83.34     85.00     1.99% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   22 Pfizer      1810.58   2299.00   $488.42 
     2/3/98   24 Microsoft   1878.45   2145.00   $266.55 
    2/27/98   27 Coca-Cola   1865.89   2075.63   $209.74 
     5/1/98   37 Gap Inc.    1890.33   1944.81    $54.48 
     2/6/98   56 T. Rowe Pr  1885.70   1904.00    $18.30 
    2/13/98   22 Intel       1862.83   1765.50   -$97.33 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Exxon       1286.70   1473.75   $187.05 
    3/12/98   20 Eastman Ko  1262.95   1392.50   $129.55 
    3/12/98   17 General Mo  1230.89   1255.88    $24.98 
    3/12/98   15 Chevron     1250.14   1275.00    $24.86 
                               CASH   $3910.83 
                              TOTAL  $21441.89 
 *The year for the S&P and Nasdaq will be as of 02/03/98