A look at how to start...
by Al Levit
Glendale, CA (Aug. 12, 1998) -- Today is Wednesday, which is Q&A day. Normally, we go to the Cash-King folder for our questions. But today I'd like to feature a new Fool named Russell who asked me some great questions via e-mail before he had registered to our Web boards. Russell wrote:
I'm relatively new to Fooldom, however
I've been reading about the Cash-King
portfolio, and I like what I've seen and the
principles it's based on. My question is
this -- being a new investor and not having
a lot to invest with, how would you
recommend I start in the C-K portfolio?
Should I buy the stocks that aren't doing
as well (buy them while they're low) or
should I buy a couple shares of each
(which would kill me on commissions)?
Also, some of these prices seem a bit
high, and would really take a chunk out of
my initial investment. Also, I think it would
be harder and harder to increase profits as
these higher stock prices climb. An
example may explain my idea more
Your [earlier model] portfolio bought
Dell (Nasdaq: DELL) at roughly $4/share.
Dell has grown tremendously -- to $111. If
I were to buy shares in that, the stock would
have to hit $222 to double my money. My other
question would be: why not continue to
look for stocks that are like Dell were when
it was at $4/share? This would seem to
give the greatest chance to increasing
profits. Each time a stock grows, (to me)
it gets harder and harder to increase your
profits. Am I right about this?
Thanks you for your time. I look forward to
talking with you in the future at
www.fool.com, once I get registered to the
Russell brings up a lot of questions that are on the minds of new investors in general, as well as new visitors to the Cash-King Portfolio. Here are some answers:
First of all, Russell, you've asked about which Cash-Kings I'd recommend to start a portfolio. Well, I know this is the Cash-King column, but the truth is that I personally wouldn't start a portfolio with Cash-King stocks. This is my personal preference, not necessarily the position of all the managers here. But I'd recommend that you start with a base of Fool Four stocks. They're more defensive and less volatile stocks. You can learn a lot more about the Fool Four in our Dow Dividend section. After a portfolio has a base of Fool Four stocks established, then I'd recommend researching Cash-Kings and adding them to your portfolio as time and finances allow.
Secondly, you mentioned that you feel some of the stocks in our model portfolios, like Dell, are simply too highly-priced to continue their market-smashing performance. This brings up a couple of interesting points. Number one, it's important to remember that although the Simpleton Portfolio and MoneyHeavy Portfolio, outlined in Step 1, both inspired Cash-King investing, they have some different components to them than we feature now. For example, Dell Computer is not in our portfolio here.
And if you look closely, you'll find that a few of the stocks in those "inspirational portfolios", which have put up unbelievable performance numbers, were not truly Cash-Kings, at least not at the time that they were selected. America Online (NYSE: AOL) was not profitable when it was selected for both the Simpleton and MoneyHeavy Portfolios. A company can't be a Cash-King unless it has a history of earnings. And Dell probably isn't a Cash-King, though there is some debate. I don't believe it is, because of the low gross margins and lack of repeat purchasing. (Before I get flamed, I do think Dell is a great company. I own many shares myself. I just don't treat it as an automatic buy-and-hold Cash-King business.)
So, the portfolios that inspired this C-K account held some of what we call "Cash Princes" in them -- businesses that are growing rapidly but that have not yet solidified the dominant, leadership position in their industry. I would add these sorts of investments only after a sturdy Fool-Four and Cash-King grouping were in place. I do think you'll see us add a Cash-Prince to our portfolio over the next year, but for now, we've built this account on Kings.
Russell, you also expressed some concern about buying stocks with relatively high prices, such as Dell at over $100 a share. This can be confusing for new investors, but it's an absolutely critical point. When Tom selected Dell for the Simpleton Portfolio on May 1, 1995, it wasn't trading at $4 per share, it was trading at $64 a share. In this case, Dell has executed stock splits amounting to a 16-for-1 split over the last three years. Dell, like many companies, prefers 2-for-1 splits. After the split, shareholders have twice as many shares and each share is worth exactly half as much.
In other words, the total value of the company and your investment remains the same the moment the stock splits. The dollar amount that you pay per share might look important to a new investor, but it really is meaningless. Some great companies trade for $12 per share and some horrible companies trade for $155 per share. Other great companies trade for $940 per share, while some dogs trade for $32 per share. The stock price is almost entirely meaningless. Dell Computer provides a wonderful example. Tom didn't select that stock when it was at $4, but rather when it was at $64. And I feel pretty confident that he would have selected the company if it's stock was trading at $640.
In fact, the only share prices that we worry about are those trading below $5 per share. These are called "penny stocks", and you won't find much information about them at The Fool. They are the highly-volatile stocks of typically low-grade companies that some brokerage firms try to manipulate. We steer a couple miles, or a couple thousand miles, wide of this universe of stocks.
Russell, I hope that was helpful. Please drop any follow-up questions to our message folders linked in below. I couldn't answer all of your questions in the space alloted here, but I hope that this gets you started on the right foot.
That's it for today. Tomorrow I begin a two-part series looking back from the stock market into our personal finances. I think you'll enjoy it.
Stock Change Bid AXP + 1/8 98.63 CHV + 1/2 79.88 CSCO + 9/16 98.56 KO + 3/16 79.69 GPS +4 1/16 66.56 EK - 13/16 81.69 XON - 72/95 67.24 GM + 5/8 69.63 INTC +1 1/16 85.63 MSFT +1 5/8 105.06 PFE -2 3/16 101.81 TROW + 25/32 34.47
Day Month Year History C-K +0.96% -1.85% 13.44% 13.44% S&P: +1.43% -3.25% 8.28% 8.28% NASDAQ: +1.83% -2.50% 10.44% 10.44% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 105.06 34.23% 5/1/98 37 Gap Inc. 51.09 66.56 30.28% 2/3/98 22 Pfizer 82.30 101.81 23.71% 2/27/98 27 Coca-Cola 69.11 79.69 15.31% 6/23/98 23 Cisco Syst 86.35 98.56 14.15% 2/6/98 56 T. Rowe Pr 33.67 34.47 2.36% 2/13/98 22 Intel 84.67 85.63 1.12% 5/26/98 18 American E 104.07 98.63 -5.23% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 81.69 29.36% 3/12/98 20 Exxon 64.34 67.24 4.52% 3/12/98 17 General Mo 72.41 69.63 -3.84% 3/12/98 15 Chevron 83.34 79.88 -4.16% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2521.50 $643.05 5/1/98 37 Gap Inc. 1890.33 2462.81 $572.48 2/3/98 22 Pfizer 1810.58 2239.88 $429.30 2/27/98 27 Coca-Cola 1865.89 2151.56 $285.67 6/23/98 23 Cisco Syst 1985.95 2266.94 $280.99 2/6/98 56 T. Rowe Pr 1885.70 1930.25 $44.55 2/13/98 22 Intel 1862.83 1883.75 $20.92 5/26/98 18 American E 1873.20 1775.25 -$97.95 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1633.75 $370.80 3/12/98 20 Exxon 1286.70 1344.84 $58.14 3/12/98 17 General Mo 1230.89 1183.63 -$47.27 3/12/98 15 Chevron 1250.14 1198.13 -$52.02 CASH $94.76 TOTAL $22687.04 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.
*The year for the S&P and Nasdaq will be as of 02/03/98