Fool Portfolio Report
Wednesday, June 26, 1996
Wednesday, June 26, 1996 (FOOL GLOBAL WIRE)
by David Gardner
ALEXANDRIA, VA, June 26, 1996 -- The technology market continued its summer selloff Wednesday, and the Fool Portfolio continued to reflect that dramatically, suffering a one-day loss in excess of 8%.
That's an 8% lick off our whole ice-cream cone. Just one lick. 8%. Sheeesh.
Every single Fool stock dropped... oops, check that. Sears was unchanged. Good ol' Sears.
Most of our stuff decided to just up and drop $3/4 or $7/8. That includes Chevron, General Electric, The Gap, and Medicis, all of which mirrored the weakness in today's NASDAQ (off 1.65%) and S&P 500 (off 0.61%). (The NASDAQ is now off more than 7% for the month.) KLA Instruments hit a new 52-week low, bidding $21, but heck, that quarter point only cost us $32.50.
Once again, Iomega led us down most swiftly of all, losing 21% of its market value... a more slobbering lick off its ice-cream cone. But today's drop was induced by a very interesting new reason, which deserves some further examination. The move apparently came about following a sell recommendation from a momentum-investing newsletter entitled The Cabot Market Letter. If there was ever any strong proof of fluff and speculation factored into Iomega stock, it would have to be today's drop. How fragile we find human sentiment to be. The volatility of this stock bespeaks volumes about the lack of investment sophistication shared by newsletter readers and institutional investors alike, to say nothing of its status as another obvious refutation of the efficient markets theory.
As I understand it, the Cabot newsletter has racked up slightly above-average long-term returns. Nothing to write home about, we understand, though ahead of most of its peers; that's a comment more about the sad state of the financial newsletter industry than anything else. Anyway, I'm also given to understand that Cabot has already traded in and out of Iomega at least once before, and that had the letter just held its shares from its initial purchase price, it would have made more money than it did trading in and out and in and out... including today's drop. (Including today's drop, we remain up in excess of 700% over the past year -- we'll take that every time.) That accords with my own belief, backed up by messieurs Buffett and Lynch, in the importance of buy-and-hold investing. I just see this happen so many times.
Anyway, an article today in The Wall Street Journal looks at the newsletter writers' investment style; it's essentially a momentum-based approach, often concentrating on story stocks. That is, the Luttses who run the letter combine a huge interest in buying the latest hot thing with a specific attraction to things that don't yet have much sales and earnings, relative to their valuations: "stories." (Presstek is the best example; Iomega is, ironically, a strong business that should do in excess of $1.5 billion in sales this year, and thus an exception.) Anyway, you look over the Cabot portfolio and you see momentum, momentum, momentum. The reason expressed for the latest sale of Iomega in Cabot's "Fax Bulletin" sent out last night? "The stock's momentum is weakening."
Um, are we just playing the horses at the track, betting on marbles during an elementary school recess, or are we valuing companies? I have no axe to grind over the Cabot letter, and their return on IOMG was apparently 200% for their latest run... lots better than most. But you need to understand the quality of someone's rationale underlying their actions before really understanding or judging those actions. In this case, I'm unimpressed; you can teach this form of investing to a five-year-old. ("Sonny, see that one that just went up? Buy it, until it doesn't go up anymore. Then sell, Sonny, just sell.")
TRAKER 8 wrote the following early this morning in the Iomega folder: "Nothing against [Cabot], but they have been wrong on Iomega before. I believe they had Iomega as stock of the month in '95 then a few months later sold, due to a correction Iomega had, and they had a loss of 20%. Then a few months after they sold, they went in and bought it back, at a much higher price. Now, they are selling again...."
Apparently, the market considered this worth $725 million, which is what Iomega's capitalization lost in value today. After watching a drop like this one, devoid of any fundamental importance, we have a fine seat front-row-center to watch cluelessness and silliness spill a little blood on the Street.
This is why I love being a Foolish investor. I love to sit back, watch bemusedly, and chuckle. Because, my fellow Fools, those of us uninterested in participating in the ways of the Wise prefer to focus on business research and fundamentals and long-term investing. If you want to play the short-term momentum game, go ahead and subject yourself to the whims of the financial newsletters, the brokerage house recommendations, and whatever Joe over at Big America Papers wants to talk up or down today. If you want, on the other hand, to think for yourself, do not hesitate to harness the power of the long term for your benefit. Please remember:
--the truth always outs in the long term
--long-term stock performance correlates strongly with long-term earnings and sales gains
--random walks have no real application to the long term
So invest for the long term.
To close on Cabot: If you invest in momentum story stocks, and toss 30,000 subscribers in and out of a stock multiple times in a given 12-month period, you're playing with the market. You're not investing. The interest of Cabot and some other bulls---former and present included---was primarily rooted in Iomega's price performance. Their rationale for their moves spells it out quite clearly. When the momentum dried up, they sold out... ironically, they sold out as the stock hit $26, driving it down to today's closing bid of $20 7/8... that's down from $55 just a few weeks ago! The valuation of Iomega, its market position, its products, management, and all the other things we teach and continue to learn about in this forum, are largely irrelevant to that mindset. That's why it's not our mindset.
IOMG's mistake was apparently that it got "hot." Because it had "momentum," it brought in "momentum players," the Cabots and the Joneses and others, some of whom would buy options, bet huge amounts on margin, and harbor an unhealthy fascination with the daily twists and turns. Momentum for momentum's sake. We continue to hope our readers are both learning from these immediately useful lessons, and learning to avoid this sort of investing in future.
Time to put in my vote for what I expect to be a significantly higher stock a year from now. Iomega today trades at less than two times 1996 projected sales... that's what I care about. I know, I know, it's not worth $5 5/8 points tomorrow, never has been, and never will be. And I'm glad it isn't. Because that's not the way I think about investing.
---David Gardner, June 26, 1996
(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
Day Month Year History
FOOL -8.51% -29.84% 41.67% 164.53%
S&P 500 -0.61% -0.71% 7.87% 44.94%
NASDAQ -1.65% -7.26% 9.61% 60.13%
*Scroll down or expand screen for full portfolio accounting
AMER - 1/2 ...CHV - 7/8 ...GE - 3/4 ...GPS - 7/8 ...IOMG -5 5/8 ...KLAC - 1/4 ...MDRX - 3/4 ...S ---...
Rec'd # Security In At Now Change
5/17/95 2010 Iomega Cor 2.52 20.88 728.71%
8/5/94 680 AmOnline 7.27 42.00 477.49%
4/20/95 310 The Gap 16.28 31.88 95.85%
8/5/94 165 Sears 28.93 48.63 68.11%
8/11/95 95 GenElec 57.91 87.00 50.22%
1/29/96 250 Medicis Ph 27.86 39.25 40.88%
8/11/95 110 Chevron 49.00 60.00 22.45%
8/24/95 130 KLA Instrm 44.71 21.00 -53.03%
Rec'd # Security Cost Value Change
5/17/95 2010 Iomega Cor 5063.13 41958.75 $36895.62
8/5/94 680 AmOnline 4945.56 28560.00 $23614.44
4/20/95 310 The Gap 5045.25 9881.25 $4836.00
8/5/94 165 Sears 4772.65 8023.13 $3250.48
1/29/96 250 Medicis Ph 6964.99 9812.50 $2847.51
8/11/95 95 GenElec 5501.87 8265.00 $2763.13
8/11/95 110 Chevron 5389.99 6600.00 $1210.01
8/24/95 130 KLA Instrm 5812.49 2730.00 -$3082.49