Fool Portfolio Report
Thursday, March 21, 1996

by Tom Gardner (TomGardner)

ALEXANDRIA, VA, March 21, 1996 -- Percentage-wise it was pretty much a ho-hum day for the Portfolio of Pure Foolishness. Our collection of stocks advanced 0.21% on down days for both the S&P 500 and the NASDAQ.

Two of our three top stocks today moved up toward or through to new highs. Iomega Corporation (NASDAQ:IOMG) stepped up $1 on the bid to $23 7/8 (or $71 5/8 pre-split), a single dollar shy of its all-time highs. With around 60 million shares outstanding, Iomega is capitalized near to $1.5 billion. . .which the Wise seem to think is too rich for a business that could close out fiscal 1996 with $1 billion in sales.

The Gap (NYSE:GPS) closed the day up $3/4 to $57 7/8, which marks new annual highs for the stock. With around 150 million shares outstanding, The Gap is being priced at $8.7 billion today, or just long of 2x trailing sales. The Gap has now very close to a double off its 1995 lows of $29 3/4. We've only been in for 77.8% of that ascent.

When you spy the six other winners in our portfolio, all of them are sitting within 10% of all-time highs---the all-time highest price tags that Wall Street and Main Street have placed on their companies.

Today is the first time that Gap employees, executives and shareholders can claim an $8.7 billion value for their company. Only very recently have America Online stakeholders been involved with a company priced at $5.5 billion. And General Electric's owners haven't been championing a valuation of their entire company above $130 billion for very long.

New highs.

To some, they tell of froth, overpricing, and oncoming bear markets. To others, they indicate that these are the best of all times for businesses showing signs of only growing bigger, more profitable, more valuable.

Sometimes the bears are right. When word started traveling that personal computer sales were slowing down into the springtime, Dell Computer (NASDAQ:DELL) validated that by announcing lower than expected earnings. And the business which was being priced at $4.5 billion---the most valuable the company had ever been---was hammered by investors.

Today Dell is priced at $3 billion, and what may have looked like the brightest of days growing brighter by the hour soon took on all the qualities of a sunless afternoon crowded in by umbrellas thrown up into the mist. At one point in mid-January, Dell had been halved.

But sometimes the bulls are right. Wasn't it only six weeks ago that Microsoft had no Internet plan, and America Online was going to get swallowed by the Web? I believe I read of both of these in a single day in the same financial newspaper that everyone thinks is a great resource for private investors.

Today Microsoft is being valued at $59 billion and America Online at $5.5 billion, both within striking distance of the richest valuations they've ever known. And when you look back over the past three years, America Online has increased its capitalization by over 100% per year and Microsoft by more than 25% annually. MSFT has been one of the greatest investments on the US markets since its IPO; so too with AMER. Investors have been treated to new highs by these stocks again and again and again. . . and again.

So where is the Foolish investor to look for some truly defining precedents? Should we assume that the entire market is about to get DELL-ed. . . or are there more new highs on the way? What about the collection of stocks in our own portfolios? Will The Fool Portfolio, for example, be sporting six stocks near all-time highs in six months, or are we hearing the last gears grind as our trolley snails over the final hump before whipping furiously down the track into dark tunnels, where Foolcaps are lost and shrieks are met with shrieks?

Are we charging into another 1973. . . protracted bear market. . . a 40% cut for equities .. . small-caps vanishing. . . large-caps cut in two. . . and your savings lower still? Or is it time to add to your winners, celebrate new highs, huzzahs and hurrays, and continued market outperformance?

If you've been in Fooldom for awhile, you know we don't bother trying to call the market. There are a few very significant ways that we distinguish ourselves from most other financial service outfits on the planet and our unwillingness to call the short- or intermediate-term market moves is one of them.

Make of it what you will, but we expect the Dow Industrials Average to be sitting up above 20,000 come the year 2010. That's in the ballpark of 10% annual growth over the next fifteen years. Of course, that presumes that anyone bothers looking at the DJIA for market measuring then. We'll probably have a better index long before then.

But how we get there from here, how that 10% average growth plays out year by year, is anyone's guess. I imagine between here and there we'll suffer through at least two periods where the market loses more than 20% off its latest high.

And that doesn't matter to us, because as "investors" we're looking for long-term *bottom-line* capital growth----market-beating growth on our savings, after the deduction of all related costs to investing. And that means, we sit in the market, keep commission costs down to a minimum, and concentrate our efforts on finding great companies in which to invest.

And we expect that between today and March 21, 2010, there will be many more days upon which new highs are struck than new lows. The bearish case---though compelling at first glance---is a losing position over the long haul. With its 10% average annual growth, the stock market has been in the good habit over the last century of hitting new highs.

Down at the tree level---our individual holdings---we pretty much hold with those who find plenty of reasons to be long-term bulls. Great companies in great industries in great financial standing have a way of hitting new highs year after year. Certainly not day after day, week to week, month over month, quarter by quarter. . .and of course never always year after year.

But put Coca-Cola, Nike, The Gap, Pfizer, Gillette, Microsoft, Intel et al. to the historical test and you're going to find consistent and substantial upsloping moves. Their stock graphs look like Mount Washington in mid-winter: all upward slope and no sign of a peak.

Sadly, I have this funny feeling that when the bear market does hit, and it's going to hit at some point in the next decade, Wall Street's Wisemen are going to fight their way out of the woodwork to tear at the belled-caps of those (paraphrased) "less well-trained, not so tidily suited Fools, with no credentials other than a committment to consumer alertness and an affection for the columns down a financial statement." In other words, you!

The Wise will talk the talk. And Fools who have dug out great companies, quietly supported their savings with large-cap, high-yielding turnarounds, and always held themselves accountable versus market-average growth will have to keep on at the business of walking through valuations and hammering together a vision for what our savings accounts will look like five years out and five years past that and ten beyond.

Then, as now, as always, life won't be half as much about where you are but rather where you're headed and how you plan to get there.

Today's Numbers

AMER -1 1/4...AMAT + 1/2...CHV - 1/4...GE ---...GPS + 3/4 ...IOMG +1...KLAC - 3/8...MDRX + 1/4...S - 3/8... Day Month Year History FOOL +0.21% 9.74% 25.60% 134.52% S&P 500 -0.12% 1.37% 5.40% 41.62% NASDAQ -0.18% -0.02% 4.53% 52.71% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 54.50 649.36% 5/17/95 1005 Iomega Cor 5.04 23.88 373.90% 4/20/95 155 The Gap 32.55 57.88 77.80% 8/5/94 165 Sears 28.93 51.13 76.75% 8/11/95 95 GenElec 57.91 77.38 33.60% 8/11/95 110 Chevron 49.00 55.63 13.52% 1/29/96 250 Medicis Ph 27.86 25.75 -7.57% 8/24/95 100 AppldMatl 57.52 36.25 -36.98% 8/24/95 130 KLA Instrm 44.71 24.00 -46.32% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 37060.00 $32114.44 8/24/95 100 AppldMatl 5752.49 3625.00 -$2127.49 5/17/95 1005 Iomega Cor 5063.13 23994.38 $18931.25 4/20/95 155 The Gap 5045.25 8970.63 $3925.38 8/5/94 165 Sears 4772.65 8435.63 $3662.98 8/11/95 95 GenElec 5501.87 7350.63 $1848.76 8/11/95 110 Chevron 5389.99 6118.75 $728.76 1/29/96 250 Medicis Ph 6964.99 6437.50 -$527.49 8/24/95 130 KLA Instrm 5812.49 3120.00 -$2692.49 CASH $12147.13 TOTAL $117259.63