Fool Portfolio Report
Thursday, March 28, 1996

Tom Gardner (TomGardner)

ALEXANDRIA, Va, March 28, 1996 -- An exceedingly Foolish day today, no? I mean, there are a host of wonderful lessons just sitting out there for the taking today. Let me go after two of them.

Lesson #1: Always compare the returns of your portfolio to the S&P 500.

The Fool Portfolio rose 2.17% versus a bullseyed 0.00% return for the S&P 500 today.

In 1995, the Standard & Poor's 500 Index returned 34.11%. That means that any mutual funds in your portfolio that didn't return greater than 33.85% were losers for the year. Why? Because you can always just buy the Vanguard Index Fund and get market average returns minus the 0.25% in expenses.

Ever since we opened our doors on Foolishness, our online portfolio has bonked the indices. Today's 2.17% rise puts us up 10.78% for March versus S&P gains of 1.33%. In 1996, The Fool Portfolio has risen an eye-catching 26.79% versus market gains of 5.36%. And since our inception in August, 1994, our portfolio has tripled the market, growing 136.74% versus market returns of 41.57%.

So. . . we're full of ourselves? Is that the lesson? Heck, sure. But it's not in the same league as the most important lesson.

The lesson here is simply that Fools ought *always* compare their bottom-line returns to S&P 500 growth. One of the more gratifying moments during our book tour came in Philadelphia, when a veteran and inveterate Fool reader stepped up to the signing table and announced: "Guys, in 1995, I was up 66.7%. I smoked The Fool Portfolio!"

High-fives all around for that one. Ya gotta love it.

That said, what really matters is NOT that he smashed the Fool and the Fool smashed the market and the market smashed the universe of mutual funds. Nope. What matters is that every private investor understand the significance of stock market returns in relationship to the growth in their savings. If you can't beat the market---or if your money manager can't beat the market---join it with Vanguard's Index Fund.

No one out there should own a single stock without understanding that principle.

Lesson #2: Discipline Yourself to Hold Your Winners

Iomega rose $1 3/4 today to an all-time high of $25 3/4. And America Online skipped ahead $1 1/2 to a bid of $55 1/4. These are the two best investments we've made since turning digital. AMER is now up 659.67% and IOMG has risen 411.12%. There's a lesson here, and it's one that unfortunately strikes right at the heart of the financial industry in its present form.

Fools, there is simply too much noise out there---too much trading activity and too little basic investment education. Just consider for a moment how dissatisfied a full-service brokerage firm would be with our America Online investment.

We purchased AMER on August 5, 1994 at a split-adjusted price of around $7 1/4. Had we been at a full-service firm, we would've doled out, say, $120 for the trade. Twenty months later we haven't traded out once, and America Online has been one of a handful of the best stocks on all US exchanges. We've turned our $4,945 investment then into $37,570.

Now, from Wall Street's perspective that's a BAD investment. A VERY bad investment. The firm made $120, whilst the Foolish investor made over $32,000. Of course, from the private investor's standpoint, hey, that's about as good as it gets. But that's not how the business model works for Wall Street.

Consider what does work best for the Street in situations like these. Namely, active trading. *Very* active trading, from our vantage point. The institutional world tries to predict where America Online stock is going in the week ahead, or by the end of next month, or---God forbid---by the market close tomorrow. And the financial media listens too closely to what sounds like a lot of bluster to a Fool.

Firms get their clients in and out and in and out. Back in. Out again. And they have a guru---often an excellent investor---onboard to draw up model portfolios for the firm with recommendations for the day, week, and month.

And the press is, in my mind, far too committed to reporting to these short-term stock and market predictions. . . predictions designed first around the generation of commissions and second around long-term market outperformance. In other words, predictions that are all turned around, inside out and upside down, when it comes to the individual investor.

Overactive trading, to our eye, discourages the sort of fundamental research that we've seen in the America Online and Iomega Corporation folders in Fooldom. And I think only very few in the press have really caught on to what's happening here, what are the ultimate consequences of this rapid and rather sophisticated education that we're *all* getting.

With the new technology and the awesome communication and teaching tools available now, the field is more than leveling out. It's bending in favor of the *consumer.* And will continue to. So that rather than paying out heavy fees for market underperformance---by professional investors in pink shorts on Horseshoe Beach in Bermuda---consumers are going to get market performance or better without the fees, without the telephone-call recommendations and the anxiety.

And I suspect that what, in the face of today's full-service compensation structure, oddly seems like a radical proposal (Buy great companies and hold them through wind, sun, sleet, rain, sun, snow, hail, sun again until you're absolutely convinced they've lost their shine), will tomorrow be hackneyed, trite, empty.

And hopefully before the new millennium, third-graders---those who stand to gain most by getting into great stocks and holding them for years---will have moved on to far more sophisticated things than this small, simple, numerical, accountable Folly. If all is right in Denmark, the scientific and elegant solutions of today will yield to greater thoughts and even better returns in the decades ahead.

Thankfully, the shift is toward research and bottom-line accountability---the two principles that will not only lead us all to more America Onlines and Iomegas but will enable us to hold them tight through the furious dual winds of rumor and recommendation.

Has there been a better time for Fools to roam the earth than now?

Today's Numbers

AMER +1 1/2...AMAT -1 1/2...CHV + 1/4...GE - 3/4...GPS - 1/4 ...IOMG +1 3/4...KLAC - 3/8...MDRX + 5/8 ...S - 7/8... Day Month Year History FOOL +2.17% 10.78% 26.79% 136.74% S&P 500 +0.00% 1.33% 5.36% 41.57% NASDAQ +0.09% -0.47% 4.06% 52.02% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 55.25 659.67% 5/17/95 1005 Iomega Cor 5.04 25.75 411.12% 4/20/95 155 The Gap 32.55 56.38 73.20% 8/5/94 165 Sears 28.93 48.88 68.97% 8/11/95 95 GenElec 57.91 78.13 34.90% 8/11/95 110 Chevron 49.00 57.38 17.09% 1/29/96 250 Medicis Ph 27.86 23.38 -16.10% 8/24/95 100 AppldMatl 57.52 34.88 -39.37% 8/24/95 130 KLA Instrm 44.71 22.38 -49.96% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 37570.00 $32624.44 8/24/95 100 AppldMatl 5752.49 3487.50 -$2264.99 5/17/95 1005 Iomega Cor 5063.13 25878.75 $20815.62 4/20/95 155 The Gap 5045.25 8738.13 $3692.88 8/5/94 165 Sears 4772.65 8064.38 $3291.73 8/11/95 95 GenElec 5501.87 7421.88 $1920.01 8/11/95 110 Chevron 5389.99 6311.25 $921.26 1/29/96 250 Medicis Ph 6964.99 5843.75 -$1121.24 8/24/95 130 KLA Instrm 5812.49 2908.75 -$2903.74 CASH $12147.13 TOTAL $118371.51