Fool Portfolio Report
Tuesday, January 23, 1996

by Tom Gardner

--(Alexandria, VA, Jan. 23)-- How do you build a Foolish investment portfolio?

You start with market average returns. Over the last eighteen months, the S&P 500 has risen 33.68%. Equities "investors"---those of you who have money to put away for at least three years---have to know how their portfolio has done relative to the S&P 500.

With 75% of all equity funds LOSING to market average each year, there's only one reason the majority of fund investors haven't put their dollars into a low-expense index funds. . . they've been SOLD those products without understanding the basic concept of performance relative to market average growth. Why research a universe of investment products 75% of which are worse than middling?

That's why tracking the S&P 500 and buying into index funds is our proposed first half-step into the world of equities "investing"---defined again as an activity carried out Foolishly by those who have at least three years to put their money away, to save their money. So that's why every day you'll see us relating our portfolio's performance to that of the S&P 500. Every single day, ad infinitem. Today, the S&P 500 fell 0.10%, and The Motley Fool Investment Portfolio fell 0.02%. For the year, The Fool is up 0.27%, the S&P is down 0.51%. And historically, The Fool is up 87.23%, and the S&P 500 is again up 33.68%.

If ya can't beat it, or don't want to bother trying, ya might as well join the S&P 500 via an index fund.

Step two into stocks drops us off at the high-yielding Dow stocks, more specifically, a group of stocks from the five highest-yielding, lowest-priced Dow industrial stocks. The select group has nearly doubled the market's average annual returns over the last two decades. . . that's an annual double, making for something on the order of 20% growth per year. We've tinkered with the model, to limit it to four stocks, and all of those modifications are outlined in our Dow area in The Fool's School.

Over the past eighteen months, we've watched Sears, Merck, American Express, and General Electric ALL more than double the market's returns during the period we held them. We repeat. . . all four of our five Foolish Dow holdings have doubled up on the market for us. Only Chevron, which fell $1 7/8 today has lost to market average growth, returning us 5.61% during a period in which the S&P 500 has risen 10.39%. Ah, well, four out of five stocks doubling the market ain't bad in a world where four out of five mutual funds underperform it.

Our First "Investing" Lesson: If you can't beat the stock market consistently over time, you ought to be in an index fund.

Our Second "Investing" Lesson (trump card): If you can't beat the Foolish Four, which for two and a half decades running have doubled the performance of the S&P 500 *annually*, you should not wander from this group of multi-billion-dollar giants, with huge international sales, loads of businesses under that single brand.

Performance, low-commission inactive trading, limited long-term risk, and an approach that is just so damned Foolish it hurts. . . that's what "investing" in high-yield Dow stocks is all about. Again, "stock investing" is defined here as dunking into stocks those monies which you can afford to put away for at least three years.

Step three gets you into more volatile small- and mid-capitalization issues. The stocks of companies with impressive cash-flows, strong sales and earnings growth, spotless balance sheets with high levels of working capital, high current ratios, and negligible or non-existent long-term debt obligations. In there we've found America Online and Iomega, our two strongest investments since we built the online forum. America Online is now up 426% for us and Iomega is up 196% since last May when we bought in on the company's vision.

Tomorrow, Iomega announces earnings, and some Street expectations are rumored to sit in the below 25-cent range while other more Foolish expectations sit above 50 cents. Tomorrow should tell us a lot not only about our Company, but about the development of this new medium and its importance for individual investors.

While many in the traditional media have been cautioning their readers down on this quarter's earnings, without providing much explanation, The Fool Online has housed an unbelievable research effort, a committment by our staff and other Fools to dig out all the most important *fundamental* information about Iomega and its storage products, and is sporting average group estimates that sit above all Street projections. Let's just all sit back, watch, wait, and see what comes of this. . . I imagine in that earnings report will be more lessons than most investors learn in a full year of investing. . . and that's a conservative estimate!

And there you have it: One, Two and Three.

1) Match market returns.
2) Aim to double market returns with Dow heavies.
3) Head out in search of great small and mid-cap companies to invest in.

In that third group, you're going to experience some hard losses at times. But if you rigorously account for your returns, go back to your long-term breadwinners (BTD) if you're getting hurt, and always rely on your own research before purchasing a single share of stock, the slings and arrows of outrageous fortune will fly well wide of your mind and heart.

That's just about all you'll find in our financial forum, and just about all you'll find in The Motley Fool Investment Guide, now sitting out on the bookstands. Of course, there is a great deal more complexity, considerably more value, and far higher Foolishness in our forum and in our book than sits above me in this writeup. But this is an important message: Hey, it ain't that hard. Follow the three above steps, disregard most of the complaint, the volatility, the hype, the pomp, ceremony, the titles, the kings, the long-term bears. . . disregard that which does not appeal to your common sense, that which cannot be quantified, that which cannot be Foolish.

Hope to see many of you on the next leg of the book tour. Invest for the long haul.

Today's Moves

AMER - 7/8
AMAT +1 3/8
CHV -1 7/8
GE -1 1/8
GPS +1 3/8
IOMG +1 3/8
KLAC + 1/4
S + 1/4

Today's Numbers

Day Month Year History FOOL -0.02% 0.27% 0.27% 87.23% S&P 500 -0.10% -0.51% -0.51% 33.68% NASDAQ -0.14% -2.29% -2.29% 42.75% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 38.25 425.93% 5/17/95 335 Iomega Corp 15.11 44.75 196.09% 8/5/94 165 Sears 28.93 40.63 40.45% 4/20/95 155 The Gap 32.55 44.75 37.48% 8/11/95 95 GenElec 57.91 72.88 25.83% 8/11/95 110 Chevron 49.00 51.75 5.61% 8/24/95 130 KLA Instrm 44.71 28.75 -35.70% 8/24/95 100 AppldMatl 57.52 36.38 -36.77% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 26010.00 $21064.44 5/17/95 335 Iomega Corp 5063.13 14991.25 $9928.12 8/5/94 165 Sears 4772.65 6703.13 $1930.48 4/20/95 155 The Gap 5045.25 6936.25 $1891.00 8/11/95 95 GenElec 5501.87 6923.13 $1421.26 8/11/95 110 Chevron 5389.99 5692.50 $302.51 8/24/95130 KLA Instrm 5812.49 3737.50 -$2074.99 8/24/95 100 AppldMatl 5752.49 3637.50 -$2114.99 CASH $18981.96 TOTAL $93613.21