Fool Portfolio Report
Monday, February 12, 1996

David Gardner

Well, after running up a 7.59% gain last week, we probably were starting to look and act like one of Batman's Gotham foes. So what else would you expect than the proverbial:




It's never pretty when the market goes up and the Fool drops 1%+, but this has happened before---many a time, actually---so we're quite used to it. And we're always happy to take our lumps, because that's part of investing, too.

Which presents me a good opportunity, in fact, to dwell briefly again on the risks of investing.

During these heady times, with the S&P 500 having risen 37.5% last year and 7% more already in 1996, it's possible to forget that the market does sometimes drop. But some perspective is needed, here. By my informal survey, the S&P 500 put up its best year in more than 25 years last year. The last 13 months have been, very simply, an almost unparalleled success. Many new investors, basking in the tropical heat of the market's searing 1995-6 performance, should make sure they are NOT taking dumb risks. . . like overweighting in too few securities, borrowing too much on margin, and other unFoolish stuff like that. What has gone before in the past 13 months simply doesn't accustom novices to bad days (like today), making up bad months (we had one of these in December), which turn into bad years (we haven't had one of these since 1990, really, when small stocks got nailed and the S&P dropped almost double digits).

But it does happen, and will again in the future. And that is why, dear reader, I'm mentioning this. . . because you shouldn't allow yourself to lose this key perspective, surrounded by so much optimism as we are right now.

Now, I am Mr. Eternally Bullish, and would never make any pretense to say the market is going down. Market timers are a dying breed because clients are withdrawing their funds from these money managers after they underperform drastically enough over a long enough period of time. Which is what most market timers do (cf. Hulbert's newsletter, which tracks the mostly dismal performance of financial newsletters).

But those of us who wear the motley garb of the Eternally Bullish must remember we're looking over the long term. Over the short term, we should definitely expect some nasty drops. And so if there were one message I could drum into the feathered cap of every traveler who ventures into Fooldom, it would be this: ignore short-term fluctuations and just save and invest in stocks for the LONG term. The immediate gratification of all this technology sometimes gets us all carried away with what happened today. And because most people bought stocks and are LONG, they tend not to like to hear from those who are SHORT, those who are betting that all these darling stocks are going to drop in the short term.

Everyone needs to read the most recent Fribble, produced by Steve Kahn, our own MF Bootup. (Scroll down our mainscreen listbox at keyword FOOL to find the entry.) Entitled "Sports Talk Investing," it is a brief, eloquent reminder to us that we shouldn't ever fall in love with our stocks because love is blind. Steve reminds us that out on the message boards, "People who diss your favorite stock may actually be providing useful information." Quite true. (Of course, my biggest disagreement with bears is not with their info, usually, but with their mean-spirited tones and tendency toward personal attack. . . both of which have no place in Fooldom.) But we must remember that for every buyer there is a seller, and every bullish story has a bearish story that may often not be as compelling, but certainly deserves to be aired out and understood.

So here's something unusual for our Fool Portfolio report today: a toast to the bears.

Now, speaking of bears and Gotham City, the New York Times today biffed and bammed our top stock, America Online, off $2 5/8. (The article can be read online by going over to the New York Times Business section for today, keyword NEW YORK TIMES.) It presents the short sellers' case quite thoroughly, describing the future as Internet-dominated with no need for proprietary commercial services. All the best content sites will just do their own thing on the Web, we're told, bypassing AOL and its high fees. Speaking of high fees, the article mentions that 1/3 of AOL's readers are responsible for 2/3 of its usage revenues, leading to the writer's speculation that these heavy users will get fed up and go directly to cheaper Internet providers. The article also questions AOL's accounting, suggesting that the company is underrepresenting its subscriber acquisition costs.

In other words, no new material.

My continuing problem with these arguments (which have been wrong for 18 months, helping us toward a 572% gain) is that they badly misread the future. Ten percent of America is now online. Of the 90% that aren't, do you think they're going to find a local Internet provider that charges cheap rates, and start to learn what Uniform Resource Locators are, cruise and surf looking for Cool Sites, and all the rest? Or do you think they're going to want to come to an easy-to-use, affordable service that holds their hand, doesn't charge them anything extra, doesn't force them to register (ending up on any number of mailing lists), etc.? I think it's the latter.

Articles like the one in the Times today look at the supply side, but not the demand side. They say that publishers (suppliers) don't need AOL, but they fail to recognize that SUBSCRIBERS ("demanders") DO! And publishers will always go to where the demand is, in the end. So while The Motley Fool will be launching its Web site in the next 4-6 weeks, we expect our AOL site to outperform our Web site for the foreseeable future. . . and we'll be doing much more business on AOL than on the Web, I expect. That's not to say, of course, that we're happy to be both places, and will as usual do the best we can.

Anyway, with AMER off about 5%, our portfolio was sent reeling, compounded by profit-taking in The Gap, which dropped $1 3/4.

Meanwhile, Medicis hit a new high today, releasing results of a clinical trial demonstrating the efficacy of its new drug TRIAZ, a topical acne product. The company said that within two weeks of the commencement of treatment, 84% of subjects reported marked improvement as measured by the Pillsbury Scale, a "widely recognized objective rating scale."

In our Medicis folder, many doctors have openly questioned the strength of the company's product line, charging that Medicis is putting company name brands on mainly generic products. Our point remains that with aggressive marketing and low R&D expenses, you can build quite a successful pharmaceutical business doing just that. Medicis rose to a new 52-week high closing bid of $30 today, up 8% for the Fool Portfolio. The stock touched $31 5/8, intra-day.

Fool on.

Today's Moves

AMER -2 5/8
AMAT + 1/2
CHV +1 3/8
GE + 3/8
GPS -1 3/4
IOMG + 1/8
KLAC ---
MDRX + 1/2
S + 1/4

Today's Numbers

Day Month Year History FOOL -1.44% 5.28% 11.63% 108.45% S&P 500 +0.77% 4.00% 7.39% 44.30% NASDAQ +0.07% 3.36% 4.11% 52.10% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 48.88 572.02% 5/17/95 1005 Iomega Cor 5.04 14.38 185.33% 8/5/94 165 Sears 28.93 44.88 55.14% 4/20/95 155 The Gap 32.55 49.63 52.46% 8/11/95 95 GenElec 57.91 79.75 37.70% 8/11/95 110 Chevron 49.00 56.13 14.54% 1/29/96 250 Medicis Ph 27.86 30.00 7.69% 8/24/95 130 KLA Instrm 44.71 31.25 -30.11% 8/24/95 100 AppldMatl 57.52 39.88 -30.68% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 33235.00 $28289.44 8/24/95 100 AppldMatl 5752.49 3987.50 -$1764.99 5/17/95 1005 Iomega Cor 5063.13 14446.88 $9383.75 4/20/95 155 The Gap 5045.25 7691.88 $2646.63 8/5/94 165 Sears 4772.65 7404.38 $2631.73 8/11/95 95 GenElec 5501.87 7576.25 $2074.38 8/11/95 110 Chevron 5389.99 6173.75 $783.76 1/29/96 250 Medicis Ph 6964.99 7500.00 $535.01 8/24/95 130 KLA Instrm 5812.49 4062.50 -$1749.99 CASH $12147.13 TOTAL $104225.26