Fool Portfolio Report
Tuesday, April 9, 1996

by Tom Gardner

ALEXANDRIA, Va., Apr. 9 -- Yesterday, I read David's portfolio report and frankly, at the time, I thought he was being a bit too harsh in his criticism of Louie-Rukeyser-regular, Elaine Garzarelli. He was relentless.

But then later in the evening, I actually took a few moments to read through Ms. Garzarelli's blindly-mailed leaflet entitled, "The Garzarelli Edge." I found it preposterous enough to warrant a glance at the postal-stamp in search of "April" and "1st" but found neither.

Because of this, I'm going to burden everyone tonight with two more brief snippets from this promotion, and a short review before getting to our stocks. The Edge:

"Over the last 14 years, the Garzarelli Edge has correctly forecast every major turn in the US stock market. Every single one, bar none!"

Then in a succeeding passage in the pamphlet: "After all, it's a well-known fact that Elaine Garzarelli's scientific investing system has correctly called every major market turn of the last fourteen years within 4% to 8% of bull-market peaks and bear-market bottoms."

Interesting. Rather than light into the "billion-dollar-managing guru" for staking some utterly ludicrous claims, let's just hold her at her words above: "within 4% to 8% of bull-market peaks and bear-market bottoms."

We'll start by generating some numbers to keep the analysis simple. Let's say the Dow falls from 5000 to 4500, then rises from 4500 to 5000---a petite bear market (down 10%) followed by a petite bull market (up 11%). The Garzarelli Edge group claims to have been within 4-8% of the bottom and top of those moves. What latitude lies therein?

On the way down, at 4700 and after a 6% decline, Garzarelli's "edge" gets investors out of the market. Then at 4800, after a 6.7% climb off lows, Garzarelli's "scientific system" gets you back into the market. Apparently The Edge finds something laudable in all this. You sold out at 4700, then you bought back at 4800, paid commissions both ways, and now the market has returned to 5000 where the train left the station in the first place.

So. . . higher trading commissions, worse investment returns than a simple holding strategy, $250 in subscription fees, more paper to recycle, and we actually have to read stuff like, "You'll get the news before Elaine makes any announcement to the media!"

As you well know, we've been looking for shorts out there. We may just have found our prize. In fact, with rampant hyping of an additional service, "The Garzarelli Alert," we might be forced out of our sleepy equities model and into the writing of uncovered calls on Elaine. Allocation models be damned!

All sarcasm aside: change is afoot. Twain's King and Duke are being run out of the village by their ears. And while Fools are today still subjected to gooroos hopping up on financial television, hawking overpriced newsletters, and making market calls, the Age of Information is already being translated into the Age of Accountability, and the consequences are going to be insufferable for the Wise.

Why? Because the notion that THEY know more than YOU simply isn't supported by the numbers. Gooroos can no longer get information we can't (did they ever really), and contrary to popular opinion, they were not predisposed to the analysis of financial statements any more than were you, or Suzanne the doctor, or Alfred the geologist, or Gwen the restraunteur, or Jeremy the talk-show host.

Daily, more and more evidence is mounting that supports the position that the market can't be called accurately and *profitably* and that individuals have advantages over the Street in their status as long-term investors. Commissions, taxes, compounded growth---The Foolish Strategy is to buy and hold the market, and price, buy, and sell growing businesses and the stocks that support them.

It is, of course, human nature even for a Fool to observe the market climate. And when Final Four Basketball tickets are being scalped for $10,000, and when casual investors think that Dow stocks and 25% annual returns are *sleepy* ("I only want Iomegas"), and when the five highest-yielding stocks are International Paper, General Motors, Chevron, 3M and General Electric---can you say defensive?---then we might be seeing early signs of some foaming. Mild inflation creeping in.

(Aside: Remember 1994, when IBM was at $45 and in the Foolish Four group? That said something about technology turning around, eh?)

But would we ever pull capital out of the US market? Certainly not. With a Foolish blend of Dow high-yielders, rapidly growing mid- and small-cap companies, and shorts (coming soon to a theater near you), why exactly would anyone take capital out of the best-regulated and most-enterprising markets and companies on the planet?

US stocks have posted 10.5% average upward movement per year over the last century. Fools use stocks as a savings vehicle; and we'll use The Edge promotional pamphlet for paper basketballs.

Oh, by the way, did I mention that The Fool Portfolio fell a whopping 2.36% today, trailing the S&P 500 by more than 2%? No!? Darn. Ouch.

Investors riding Iomega's recent strength took some profits today. . . to the tune of a nearly 10% decline. IOMG fell $3 1/4. Earnings are around the corner and wethinks sales will be stronger than Street expected but earnings will be slowed by advertising. How the market will react to this in the weeks ahead, in our minds, doesn't even register when weighed against the value of the consumer brand and disk sales in the years ahead.

Iomega was joined on the downside by General Electric, which fell $1 1/4 to $78 3/8. GE is up over 35% for us and reminds us once again that Beating the Dow actually *rose* more than 37% in 1973 and 1974, when the market was getting halved. Something there is that's Foolish about billion-dollar turnarounds when the market is blinded by visions of growth, growth, growth.

Retail had a strong day today. The Gap rose $5/8 and Sears climbed $1 1/8 to $48 1/8. I just don't think enough can be said about Sears' recent annual report, the clear focus that the company now has on its core business and that recognition that strong reputations grow out of fundamental service. Whether or not you're invested or ever plan to invested in ole S, do consider getting a free copy of the report sent to you. In that report, Sears emphasized the links between customers, employees and shareholders. Paraphrased: "We want our buyers to be our shareholders, and our employees to take our stuff home with them."

The notion is radical. Look no further than Iomega, with its Zip, its staff, its customers, and its stakeholders all blending together.This aspect of public business is being notably redefined today. Never was Mr. Buffett's high regard for robust consumer brands, consumer growth, and internal cashflow ever so powerfully supported and laid so bare as now.

Even lowly Fools can see it.

Today's Numbers

AMER + 1/8 ...AMAT + 3/8 ...CHV - 1/4 ...GE -1 1/4 ... GPS + 5/8 ...IOMG -3 1/4 ...KLAC + 1/8 ...MDRX ---...S +1 1/8 ... Day Month Year History FOOL -2.36% 4.46% 32.76% 147.90% S&P 500 -0.32% -0.51% 4.26% 40.09% NASDAQ +0.31% 0.71% 5.42% 54.01% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 53.38 633.89% 5/17/95 1005 Iomega Cor 5.04 32.13 537.66% 8/5/94 165 Sears 28.93 48.13 66.38% 4/20/95 155 The Gap 32.55 52.25 60.52% 8/11/95 95 GenElec 57.91 78.38 35.33% 8/11/95 110 Chevron 49.00 56.38 15.05% 1/29/96 250 Medicis Ph 27.86 26.25 -5.78% 8/24/95 100 AppldMatl 57.52 37.25 -35.25% 8/24/95 130 KLA Instrm 44.71 25.00 -44.09% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 36295.00 $31349.44 8/24/95 100 AppldMatl 5752.49 3725.00 -$2027.49 5/17/95 1005 Iomega Cor 5063.13 32285.63 $27222.50 8/5/94 165 Sears 4772.65 7940.63 $3167.98 4/20/95 155 The Gap 5045.25 8098.75 $3053.50 8/11/95 95 GenElec 5501.87 7445.63 $1943.76 8/11/95 110 Chevron 5389.99 6201.25 $811.26 1/29/96 250 Medicis Ph 6964.99 6562.50 -$402.49 8/24/95 130 KLA Instrm 5812.49 3250.00 -$2562.49 CASH $12147.13 TOTAL $123951.51