Fool Portfolio Report
Wednesday, April 3, 1996
(FOOL GLOBAL WIRE)
by David Gardner (MotleyFool)
ALEXANDRIA, VA, April 3, 1996 -- Pumped up by HUGE hype from a cover article in the current issue of a well-known national financial magazine, Iomega shares led the Fool Portfolio higher again on Wednesday. Iomega, floating on the high seas of print-industry touting, rose $1 3/4 to a new all-time closing high bid of $29 1/8. The stock touched over $30 mid-day amidst this exaggerated magazine embellishment.
So, why did Iomega rise so strongly once again today? I don't think it was today's press release, but the Dell announcement bears some mention anyway. Iomega today announced that its Zip, Ditto, and Jaz storage drives would be included on Dell's "Government Services Administration" purchase schedule. In other words, government workers will now have the ability to buy these drives conveniently packaged with their Dell products. Iomega, which just a couple years ago did the majority of its business with the datgum guv'ment, "reaffirmed its commitment to its government customers," in the jargon of today's BusinessWire release. Whatever.
No, I suspect the REAL reason behind yet another great jump in IOMG shares was (ta-da!) short covering! Short sellers are getting toasted dark-brown by this stock, which we've watched happen now over the better part of a year. We've mentioned this phenomenon in a few of our recent Fool Port recaps because it's no coincidence that our two best stocks (Iomega and America Online) have been among the most heavily shorted all the way up. And it appears that the "short squeeze" continues.
For our new readers who may not know what a short squeeze is, you're getting a wonderful opportunity to watch one this week. Short sellers are investors who play stocks to drop, and they do so by first selling and THEN buying back later (hopefully at a lower price). How can anyone do this? Easy. You just open a "margin account" and ask your broker to BORROW shares for you to sell short. It's pretty seamless. Anyway, later you hope to buy back the stock at a lower price, and if successful, you pocket the difference.
In fact, the goal with short selling is really the same as buying and holding: you aim to buy low and sell high. Only with shorting, you're trying to do these in reverse order, selling high and then buying low. You can read more about it in The Eleventh Step of our Investing Foolishly area (hit the "Investing Foolishly" button on our main screen, then find #11).
But what happens if you short a stock and it goes up? And up again? And then, a month or two later, up again? And what happens when even "The Wall Street Journal," "Barron's" (yep, Alan Abelson), CNBC (Danny D., no less), and most of the other old media organizations you know of report negatively about the stock, and yet it still doubles even more yet again?!! Chances are, you're probably going to quit. You're going to cover. You lost money, and you're outta there.
When enough short sellers do this at once, in a near panic, you have a short squeeze. . . the short sellers have been squeezed. And Iomega, which two weeks ago was below $23, and a month ago today was below $17, just closed above $29 on no meaningful corporate news. For those of us who have believed in this company and this stock for a long time, these days are very special. They represent our convictions having been proved out by a market willing to reward good high-tech companies. And so with a smirk I'll just add that I doubt anyone's going to write a cover story celebrating what's actually happened here in cyberspace, but so much money has been made by so many of our readers that, um, it doesn't really matter, does it?
The rest of our stocks today were fairly uninteresting, with a couple decent moves (Applied Materials up $1 1/8), and a few underwhelming ones (Medicis hitting a new Fool low, bidding $23 1/4---that one's now off 17% since purchase).
We occasionally get messages from well-meaning readers who say, "Hey, guys, America Online and Iomega are now worth $67,181 of your portfolio's $121,851 total. That's 55% in just two stocks. That's insanely risky!"
My answer remains to ask a question back: "How did that develop in the first place?" The response is obviously that both stocks appreciated to those values over the course of time; we didn't "load up" on them at the beginning. And that's exactly what we EXPECT will happen with our portfolio over time. . . yours too, if you're Foolish.
What I mean by that is that if you learn to HOLLLLLLLLLD your winners if they remain great companies in dynamic growth industries, if you pay no mind to the bears and the old media trying to shake you out, the same thing's going to happen to your portfolio too, and well it should. You see, none of us is going to pick 10 winners out of 10 stocks. Chances are you'll have 3 good winners (say), a couple of real dogs, and mish-mash in between. But even under those conditions, you can make lots of money investing in stocks. Hey, how did your winners get to be winners in the first place? Things went very well for the company and the stock. And it's odds on that'll continue, in many cases, because what you've located is a great investment opportunity (like Iomega or America Online) that is going to keep smashing the competition and changing the world. You want to own that. You want to hold that. That's the way to make the most money, ultimately, in the stock market.
You know, there's an older chap in my investment club here in the DC metropolitan area who's a sweet enough fellow but makes one key investing mistake. He raises his hand at our meetings WHENEVER a given stock (a WINNER, of course) has risen to become more than 10% of the club's assets. "We have to sell some," he says. The end result of this would be constantly to prune our winners, moving the money into investment situations that are, in all probability, NOTHING compared to what we've just cashed out of. Likewise, some of our online readers suggested we sell Iomega and America Online when they were up 50%. "Cut back, guys," it was said, "because you should take half off the table when you've made half your money back." Same thing at 100%. 200%. And same at 300% and 400%. But you know what? We're still not listening. It's because until we see a FUNDAMENTAL CHANGE in the business or the company, we don't drop a stock just because it's done well. Or "too well." Quite the contrary. . . those are the ones we prize most.
OK, I need to conclude by saying that this is OUR Foolish approach. . . doesn't have to be yours. If you want to be the guy who clips stocks at 10% of assets, that's fine with us! Honestly. Each of us needs to invest according to our own tastes, tolerance for risk, background, etc. We're ALL different. Hey, we're no investment pros. We've never pretended to be anything remotely related to "gurus." (Yuck.) And some of the entrenched media has even taken to calling us kids, kids (we're told) who've apparently never heard of a bear market.
So don't listen to "kids." Follow your own instincts. I just wanted to explain ours.
---David Gardner, April 3, 1996
AMER - 1/8 ...AMAT +1 1/8 ...CHV + 1/4 ...GE + 5/8 ... GPS - 1/4 ...IOMG +1 3/4 ...KLAC + 1/2 ...MDRX - 1/8 ...S + 3/4 ... Day Month Year History FOOL +1.66% 2.69% 30.51% 143.70% S&P 500 +0.09% 1.61% 6.49% 43.08% NASDAQ +0.41% 1.32% 6.06% 54.95% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 55.75 666.55% 5/17/95 1005 Iomega Cor 5.04 29.13 478.11% 8/5/94 165 Sears 28.93 48.50 67.67% 4/20/95 155 The Gap 32.55 53.38 63.98% 8/11/95 95 GenElec 57.91 80.25 38.57% 8/11/95 110 Chevron 49.00 57.38 17.09% 1/29/96 250 Medicis Ph 27.86 23.25 -16.54% 8/24/95 100 AppldMatl 57.52 35.75 -37.85% 8/24/95 130 KLA Instrm 44.71 22.50 -49.68% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 37910.00 $32964.44 8/24/95 100 AppldMatl 5752.49 3575.00 -$2177.49 5/17/95 1005 Iomega Cor 5063.13 29270.63 $24207.50 8/5/94 165 Sears 4772.65 8002.50 $3229.85 4/20/95 155 The Gap 5045.25 8273.13 $3227.88 8/11/95 95 GenElec 5501.87 7623.75 $2121.88 8/11/95 110 Chevron 5389.99 6311.25 $921.26 1/29/96 250 Medicis Ph 6964.99 5812.50 -$1152.49 8/24/95 130 KLA Instrm 5812.49 2925.00 -$2887.49 CASH $12147.13 TOTAL $121850.88