Fool Portfolio Report
Thursday, March 7, 1996

by Tom Gardner (MotleyFool)

Iomega gave back $5/8 today, settling in at a bid of $17, and when that happens on an up day for the market, there's a pretty good chance we're going to pin the white ribbon to our left ear and head home in tears.

Fighting desperately to kick back the lesser market indices was America Online, which climbed $3/4 on startling rumors that it was enterrtaining proposals from Microsoft to begin using the Redmond-Washington giant's Web browser, Internet Explorer.

Time to get those old business case-study books out! Negotiate with the smaller player, Netscape, to land a better deal with the juggernaut, Microsoft. Or negotiate with the bigger player to get the mite on the cheap. However this plays out, whoever America Online ends up signing on with. . . would you agree, Fool, that the promising aspect to all this is that everyone is talking to everyone.

When seemingly direct competitors talk, when potential opposites ally, that generally means one of two things. First, the industry is dying and the only route to survival is thru alliance. Second, there's so much growth that the only way to efficiently, methodically, aggressively exploit it is via cooperative effort with various partners. With projected annual growth rates above 100%, the Internet and the online services are generating a good deal of room out there.

Let's tie business today to national myths. If the Hatfields and the McCoys had signed a joint venture to mine Eastern Kentucky coal, mix bourbon, and develop a diverse manufacturing base, who knows how much more productive the families would be today. Great business opportunities have a way of glass-casing shotguns.

So whomever America Online signs on with, Netscape or Microsoft, I think the public naysayers are going to learn about business bedfellows. They can make for strange ones. What seemed like a boxing match between the Internet and Online. . . hey, it's starting to look like a roll in the hay.

I think if you date back and read through all the posts in our many America Online folders over the last twenty months, you'll find that an awful lot of private investors have been proposing that broad alliances in the digital world will turn lead pipes into peace pipes, hostile parties into partners. Fascinating to watch it unfold, fascinating for all of us to participate in it as much more than passive readers.

So, America Online rose $3/4 and Iomega fell $5/8. Is there any reason to check the other stocks in our portfolio? Heck, these two make up more than 50% of the monies in our account. As the S&P 500 climbed 0.25% and the NASDAQ took second with 0.12% growth, The Fool Portfolio fell 0.23%.

A few of our readers have asked us to address just this issue, and so I'd like to close tonight's report with an explanation of just why we have not and do not plan to pare back those holdings.

We counsel that no investor build their portfolio by taking larger than 15% entry positions in any single stock. . . meaning that we don't think any equities portfolio should house less than seven stocks. The only time we think it acceptable that a portfolio show less than seven stocks is if a Fool is building a Dow Dividend account. Four stocks with tens of billions of dollars in trailing sales is certainly a diverse enough portfolio.

However, we also don't think that a portfolio should sport more than a dozen holdings, either. Can you study more than twelve quarterly reports every three months? Can you read more than a dozen stock folders? Follow the news of more than a dozen companies? If you have a full-time job beyond the Street, probably not. Four giant companies, three mid-caps, three small-caps, two shorts. . . that seems manageable.

If you agree there, you ought to then scroll back into Fribbledom and re-read MF Bogey's article entitled "Betting on Dead Dingoes." It promotes not adding to your losers and not selling your winners. We'll never add to our losers; there are enough other great companies out there. We will also, however, never pare back our winners unless the fundamental story changes. To our eyes, America Online and Iomega have as much growth potential today as they did when we purchased them.

If things change, and things do change over time, we may well slim down our position or sell our entire holding of either of these stocks. Until things change, though, we like to have our money in the companies whose stocks have beaten the market handily in the past. That's not a bad screen to run by the way. Outperforming stocks are the breadcrumbs to great companies.

This is certainly not the way everyone runs their portfolio. Some people think investors should have 56 stocks, 3 bond funds, an index fund, 4 gold bars, 3 French hens, and a ruby-inlaid Chinese vase. That's not our style. We think 8-12 stocks is ideal for any and all monies that an investor has to put away for three or more years. Hopefully more, since compounded growth and low-commissions rewards the long-haul investor far more than others.

And when it comes to holding your winners. . . well, we like to hold those handles until the plastic horse looks tired, until the training wheels wobble, until the moped wheezes. Not really a justification, just an explication.

Fool on,

TODAY'S OTHER FOOLISH STUFF: (to be read in Casey Kasem voice): The Motley Fool Invesment Guide debuted on the charts at number five this month. The New York Times Business Book Best Seller list shows Bill Gates' "Road Ahead" at number two. A little more momentum, a touch of old guard-new guard rotation, and Foolishness edges out the founder of the most profitable company of the 21st Century. Set to!

Today's Moves

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

Today's Numbers

Day Month Year History FOOL -0.23% -2.67% 11.39% 107.99% S&P 500 +0.25% 2.06% 6.12% 42.59% NASDAQ +0.12% -0.63% 3.89% 51.78% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 47.25 549.67% 5/17/95 1005 Iomega Cor 5.04 17.00 237.44% 8/5/94 165 Sears 28.93 47.75 65.08% 4/20/95 155 The Gap 32.55 53.25 63.59% 8/11/95 95 GenElec 57.91 77.88 34.47% 8/11/95 110 Chevron 49.00 55.50 13.27% 1/29/96 250 Medicis Ph 27.86 27.50 -1.29% 8/24/95 100 AppldMatl 57.52 32.63 -43.29% 8/24/95 130 KLA Instrm 44.71 22.00 -50.80% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 32130.00 $27184.44 8/24/95 100 AppldMatl 5752.49 3262.50 -$2489.99 5/17/95 1005 Iomega Cor 5063.13 17085.00 $12021.87 4/20/95 155 The Gap 5045.25 8253.75 $3208.50 8/5/94 165 Sears 4772.65 7878.75 $3106.10 8/11/95 95 GenElec 5501.87 7398.13 $1896.26 8/11/95 110 Chevron 5389.99 6105.00 $715.01 1/29/96 250 Medicis Ph 6964.99 6875.00 -$89.99 8/24/95 130 KLA Instrm 5812.49 2860.00 -$2952.49 CASH $12147.13 TOTAL $103995.26