Fool Portfolio Report
Tuesday, May 7, 1996

by Tom Gardner (TomGardner)

ALEXANDRIA, VA, May 6, 1996 -- The Fool edged forward 0.75% today, pushing fiscal 1996 Foolish returns to 83.36% versus S&P 500 growth of 3.62%. Remember that the vast majority of mutual funds are losing to those S&P returns. Today's climb rode the shoulders of another strong move northward by America Online (NASDAQ:AMER). AOL is sporting a new-high closing price of $70 today.

Reuters reported this morning that the stock had burst ahead of late on a Japanese news report linking America Online and Mitsui in a partnership to provide online services in Japan. Reuters also noted that this morning Lehman Brothers analyst Brian Oakes reiterated his buy rating and said he is looking for the company to report $0.13 a share, after goodwill, on revenues of about $301 million for the quarter. He is looking for subscribers at the end of the quarter to be above 5.5 million.

Tomorrow morning, America Online will announce 3rd quarter earnings at 8 AM, before market open. Zacks Analyst Watch lists consensus estimates of $0.13 vs. $0.06 for the 3Q a year ago. With sales projections of above $300 million for the quarter, AOL is slated to do nearly 40% of its trailing twelve-month sales today of $705 million, *just this quarter.* That's growth. And of the 14 Street analysts following America Online, not a single one of them expects the company to post less than a $1 billion in sales for fiscal 1996, ending this June 30th.

And that tells the tale of a key component to our Foolish investment approach: With smaller growth companies tied to wide-open industries, investors should consider overweighting their focus on revenue growth. This is not for a moment to say that future earnings and cash-flows aren't of supreme significance. . . simply that in the right industries, with the right management squad, early and rapid sales growth will translate into extraordinary cashflows down the line.

That's an investment approach to which many of the Wise do not cotton. In their---we think---unhealthy concentration on the earnings per share (EPS) line and on the movement of stock prices, they oft ignore altogether the business and managerial philosophy that sit behind those performances---and they almost always trivialize the value of a consumer brand. Put as succinctly as I know how: They focus on stock price fluctuations rather than on the fundamental underpinnings of the business.

Messrs. Buffett, Lynch, Munger, Price. . . they've taught Fools to be damned certain that they know the businesses in which they invest. It is fundamental business research in this forum that has unearthed a precious trinket, a pearl, a fine-cut jewel---America Online. And it's that style of research that has inspired us to continue holding AMER even after the first growth of 20%, then 40%, then 80%, then 220%, then 363%, etcetera. The stock is up 862% since we purchased it in August of 1994.

But hey, if you haven't invested in it, and don't feel comfortable investing in it now. . . exhale. It doesn't matter. Don't let yourself get caught up in this "Letting the Big One Get Away" mentality to investing. It's ludicrous. Over the next two decades there are going to be loads of extraordinary companies that bloom and blossom, that shine and glisten, that grow and multiply---depending on your favorite analogy.

If you take nothing else away from The Motley Fool beyond your mastery of the Fab-Four Dow stocks and their 22% historical returns, I hope you'll at least move on with the notion that you ought tend to watch closely the *businesses* that you invest in, tend to leave your winners well-enough alone, and pare back your losing investments. As we watched AOL's subscriber numbers fly through the roof, and saw new partnerships with all sorts of aggressive media partners roll through, we didn't pass many (any) anxious moments quoting the stock price. But looking back at its performance---with direct regard to its growth in sales and the extension of its brand---you'll get some sense of what it looks like to hold on tight to a monstrous-growth company.

America Online

in The Fool Portfolio

08/07/94: $7 1/2

09/07/94: $9 1/2

10/07/94: $9 7/8

11/07/94: $9 1/8

12/07/94: $10 5/8

01/07/95: $13 3/8

02/07/95: $15 5/8

03/07/95: $21 5/8

04/07/95: $19 1/8

05/07/95: $21 5/8

06/07/95: $17 7/8

07/07/95: $26 1/2

08/07/95: $27 5/8

09/07/95: $34 7/8

10/07/95: $31 5/8

11/07/95: $41

12/07/95: $41 3/8

01/07/96: $37 3/4

02/07/96: $49 1/2

03/07/96: $47 1/4

04/07/96: $53 1/4

05/07/96: $70

That movement has turned $5,000 of our dollars into $47,600 in twenty-one months. Please don't waste time worrying that you "missed out on it" if you're not an AMER shareholder. There are plenty of other great companies that will post comparable performance records---the challenge is not simply to find them, nor just to buy them, but much more significantly to understand when and why you should hold them---aggressively hold them.

Which brings me in a roundabout sorta way to today's media coverage of a handful of stocks that are storming ahead---and whose recent performance have been linked to discussions here in The Motley Fool. A couple reiterations are in order, followed by just a brief bit of philosophizing, which I apologize for now!

A. The Motley Fool portfolios announce all of their transactions the night *before* carrying them out. The portfolios are real-money offerings; they account for the costs associated with investing---spreads AND commissions. And they both provide daily peformance and news coverage on the holdings. To our knowledge, there is not a single financial or investment firm, establishment, or institution that maintains a comparable level of accountability, research, analysis and review on this blessed earth.

We have invited and will continue to invite the entire financial industry to meet these fundamentally educational, consumer-service or client-service standards.

B. The Motley Fool is most aggressively committed to dropping the costs and lowering the bars to access. This question was asked on television today: "What of those people who don't or can't have access to The Motley Fool?" We first note that investment firms across the nation publicly with regularity upgrade and downgrade stocks---even on occasion crossing up their recommendation and their holding positions. More importantly, we have been working tirelessly to answer to this concern. To date, we write a monthly column in Smart Money magazine ($15/year subscription), spilled out our entire investment approach in The Motley Fool Investment Guide (Simon & Schuster, $22), presently offer email services (The Weekly Fool), a free World Wide Web site, and most recently, The Industry Olympics Fool Fax service ($100/year.)

We anticipate vigorously cutting prices over the next twelve months as we expand onto every media platform, NOT to drive out would-be competitors but rather to give to every single individual in this country who wasn't afforded an intelligible, forthright, and profitable investment education----and that's just about ALL of us---a sound, honest, comprehensible approach to long-term investing.

Again, we have invited and will continue to invite the entire financial industry to meet these fundamentally educational, consumer-service or client-service standards.

C. The Motley Fool has not and will not involve itself in the process of angrily faxing and mailing media organizations that misrepresent our business or our intentions---or the businesses of any of the companies in which we invest. It's just simply not the right way to go about living---let alone running a healthy business. We anticipate substantial and continual ignorance on the part of many of the traditional media sources that aren't yet active participants in digital communications. And we're not so naive that we don't see some of the competitive motivations here. But neither their ignorance nor their intent excuses us from our basic responsibilities: to treat others with respect, to serve those with whom we work and for whom we work, and to educate.

The Motley Fool is primarily in da business of education. Not correction. Not reformation. Not vindication. Not even superior investment returns. Education. Teaching people how to invest their money in the stocks of the businesses that will carry us into the 21st century. Teaching them how to research these businesses and industries effectively, efficiently, and enjoyable. And teaching them to focus on ten-year returns rather than ten-month or ten-week or ten-hour returns.

We would ask that the Foolish among us would help advance that priority, would participate in the teaching and the learning process. That even means conversing with The Wise. . . rather than shouting them down or faxing at them. Right now they don't know what they're saying and haven't researched the medium enough to know where this medium is going, how it will get there, when, and why this is all happening. They don't understand fundamentally the common principles of consumer-service. Full-service of the consumer.

Please, rather than assuming that The Wise do understand them, or they should understand these principles, teach them. Explain things. Angry and aggressive communication is not Foolish. It never was. Consult Shakespeare for the evidence. Consult Shakespeare for the grounds of all this activity, for the seeds of Folly.

And enjoy yourself if you're beating or meeting the market's growth. Or review your positions if you're trailing. Because---and it still startles the island of Manhattan to hear this---if you can't beat the market, you can always join it long-term with the Vanguard Index Fund.

We can't wait to hear of America Online's earnings in the morning. A replay of the conference call is accessible after 9 AM tomorrow by calling 800-792-8900 and entering access code 665463. Fool on.

Tom Gardner, May 7, 1996

Transmitted: 5/7/96

Today's Numbers

Day Month Year History

FOOL +0.75% 9.15% 83.36% 242.38%

S&P 500 -0.40% -2.44% 3.62% 39.23%

NASDAQ -0.30% -0.66% 12.41% 64.22%

*Scroll down or expand screen for full portfolio accounting

AMER +2 3/8 ...CHV - 7/8 ...GE - 7/8 ...GPS - 1/2 ...IOMG + 1/8 ...KLAC + 1/2 ...MDRX -1 1/8 ...S + 1/2 ...

Rec'd # Security In At Now Change

5/17/95 1005 Iomega Cor 5.04 65.88 1207.58%

8/5/94 680 AmOnline 7.27 70.00 862.48%

4/20/95 310 The Gap 16.28 29.38 80.49%

8/5/94 165 Sears 28.93 50.75 75.45%

8/11/95 95 GenElec 57.91 75.38 30.15%

8/11/95 110 Chevron 49.00 55.13 12.50%

1/29/96 250 Medicis Ph 27.86 25.00 -10.26%

8/24/95 130 KLA Instrm 44.71 30.75 -31.23%

Rec'd # Security Cost Value Change

5/17/95 1005 Iomega Cor 5063.13 66204.38 $61141.25

8/5/94 680 AmOnline 4945.56 47600.00 $42654.44

4/20/95 310 The Gap 5045.25 9106.25 $4061.00

8/11/95 95 GenElec 5501.87 7160.63 $1658.76

8/11/95 110 Chevron 5389.99 6063.75 $673.76

1/29/96 250 Medicis Ph 6964.99 6250.00 -$714.99

8/24/95 130 KLA Instrm 5812.49 3997.50 -$1814.99

8/5/94 165 Sears 4772.65 8373.75 $3601.10

CASH $16434.53

TOTAL $171190.78