Fool Portfolio Report
Monday, March 25, 1996

by Keith Pelczarski (MF Czar)

ALEXANDRIA, Va, Mar. 25 -- Ah, the last week of March -- daffodils are sprouting, the cherry blossoms are beginning to open, and springtime is here again. People are out in their yards, tilling the soil, planting bulbs, and fertilizing the lawn. It's a time when the neighborhood is made anew.

Coincidentally, it's also a time when managed money portfolios are made anew. That's right, kids, it's window dressing time!

Toward the end of every quarter, portfolio managers across the country weed out their losers and buy some bright, shiny, new stocks that have been performing well. They do this so that their quarterly reports to clients don't have any smelly dogs mucking up the appearance of the portfolio.

You might be wondering what's wrong with weeding out underperforming stocks and buying good ones. Although it might sound like a good practice, let's look at an imaginary portfolio manager and some hypothetical stock trades to illustrate the seedy side of window dressing.

Shady Groves Portfolio Management is run by a guy named Les Prophet. Les is a decent guy, but he hasn't had a great quarter -- he's down 2%, and wants to divert attention from that fact, so that he can keep his clients and his country club membership.

Fools would note that being down 2% for this quarter is terrible compared to the greater than 5% gain in the S&P 500 so far this quarter, but poor Les would be out of a job if people actually looked at his performance versus the S&P 500. For purposes of my little story, let's assume that Les runs a Fool-free operation.

Les made a couple of bad picks this past quarter, notably Country Kennels (NASDAQ: BARK) and Canine Coiffures (NASDAQ: WOOF). They're each down more than thirty percent since Les bought them. There hasn't been any fundamental change in either stock; in fact, WOOF is gearing up for the dog show season. Nevertheless, Les has to get rid of these dogs and replace them with high-flyers, to draw attention away from his less than stellar performance in the past quarter.

So Les goes to the market, sells his positions in BARK and WOOF, and buys Western Ohio Widgets (NYSE: WOW) and Mountain Tech. (NASDAQ: APEX), since they've both been performing fabulously for the past few months. WOW is up on rumors that their WonderWidget will gain FDA approval for a number of medical procedures, including wart removal, teeth cleaning, and liposuction. APEX has had a fabulous run in anticipation of the release of Peak96, an internet browser that's supposed to be better than all the current browsers put together. Not only does it browse the web, it can find you a date online.

Now Les can say, "Look at these great companies I've purchased for you," without mentioning that he missed out on all the upside. This technique bears a strong resemblance to the proverbial smoke and mirrors.

Another quarter passes, and fate deals Les another blow -- the WonderWidget wasn't approved by the FDA, and Peak96 was received with less than stunning results. It turns out that the WonderWidget left some scary scars, and Peak96's autodate feature is the digital equivalent of, "Hey, baby." WOW has dropped 20%, and APEX has been buried in an avalanche of selling, down 50% since Les bought it.

Meanwhile, the dog show season is in full swing, and WOOF is forecasting record earnings this quarter. It has regained the losses it suffered, and is making new highs. BARK has also rebounded, soaring again on the rumor that it's in talks to purchase Yellowstone Puppies (NASDAQ: YELP).

What does Les do? He sells WOW and APEX, and buys WOOF and BARK (maybe he even picks up some YELP for good measure), all for the sake of appearances. Because he's measured on a quarterly basis, Les does some pretty wacky things to put the best possible spin on his performances.

And Les isn't alone. There are plenty of other portfolio managers, fund managers, brokers, and analysts who suffer from short-term-itis. Underlying the whole thing is one basic question: "What have you done for me lately?"

Because of this pressure, a lot of good people do silly things on the street, leaping from idea to idea, hoping to grab whatever it takes for their prestige to be greater, their bonuses to be fatter, and their jobs to stay theirs. That's not to mention the charlatans out there who aren't even trying to get short term performance---the ones who are only after the commission.

That's the big advantage that you, as an individual, have over the street. You're not looking to impress anyone, you don't have a Quotron strapped to your forehead, and you don't use a crystal ball to read charts -- you're a Fool. This works very much to your advantage, since you can patiently select good companies, and then, with even greater patience, watch them as they grow over a period of years, not months.

With that in mind, I'm going to share the only bit of fundamental news I could ferret out today---no need for the speculation on short-term price moves. Before I do so, let me point out that the Fool Portfolio came in last today, down 1.59%, while the Nasdaq Composite lost 1.37% and the S&P 500 gave up a mere 0.09%. It's tough to feel bad about it, though, since the FoolPort is still quadrupling the S&P 500 year-to-date, and good taste prevents me from mentioning how soundly the FoolPort is thumping the Nasdaq composite. For all the details, check out the scrolling box o' numbers just below this report.

IMP Inc. (NASDAQ: IMPX) announced today that it has received an order from FoolPort stalwart Iomega (NASDAQ: IOMG) for over $10 million worth of its Programmable Read-Channel integrated circuit. They also announced that they've shipped more than one million units of this particular component to Iomega in less than one year. Iomega wilted $1 1/4 to $22 5/8 on the announcement.

Ok, Fools, I've got to tell you that the only thing I know about Iomega is that my Zip drive is the only thing that stood between me and total data catastrophe last night. That said, I just ventured over to the always active Iomega board and checked out today's posts on the IMPX thread. What I got was some great reasoning about what that order translates to on a quantitative level. Even though the short-term impact of this announcement was negative, the long-term implications are rosy.

The great part about it was that it wasn't just one person working on the numbers, there were several, and I'm sure there will be even more tonight. That's what I love about this medium -- it brings the power of the written word to a more immediate level.

The best part is, that it's just beginning to bloom.

Today's Numbers

AMER - 1/4 ...AMAT -1 3/8 ...CHV + 5/8 ...GE + 1/2 ...GPS --- ...IOMG -1 1/4 ...KLAC - 5/8 ...MDRX - 1/2 ...S -1 1/4 ... Day Month Year History FOOL -1.59% 7.85% 23.43% 130.47% S&P 500 -0.09% 1.50% 5.54% 41.80% NASDAQ -1.37% -1.18% 3.32% 50.95% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 53.75 639.05% 5/17/95 1005 Iomega Cor 5.04 22.63 349.09% 4/20/95 155 The Gap 32.55 58.13 78.57% 8/5/94 165 Sears 28.93 49.75 72.00% 8/11/95 95 GenElec 57.91 79.00 36.41% 8/11/95 110 Chevron 49.00 55.88 14.03% 1/29/96 250 Medicis Ph 27.86 25.50 -8.47% 8/24/95 100 AppldMatl 57.52 35.00 -39.16% 8/24/95 130 KLA Instrm 44.71 23.50 -47.44% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 36550.00 $31604.44 8/24/95 100 AppldMatl 5752.49 3500.00 -$2252.49 5/17/95 1005 Iomega Cor 5063.13 22738.13 $17675.00 4/20/95 155 The Gap 5045.25 9009.38 $3964.13 8/5/94 165 Sears 4772.65 8208.75 $3436.10 8/11/95 95 GenElec 5501.87 7505.00 $2003.13 8/11/95 110 Chevron 5389.99 6146.25 $756.26 1/29/96 250 Medicis Ph 6964.99 6375.00 -$589.99 8/24/95 130 KLA Instrm 5812.49 3055.00 -$2757.49 CASH $12147.13 TOTAL $115234.63