Fool Portfolio Report
Wednesday, July 24, 1996

Wednesday, July 24, 1996 (FOOL GLOBAL WIRE)
by David Gardner

ALEXANDRIA, VA, July 24, 1996 -- The Fool Portfolio fought back a bit today, in the midst of its grandest decline in our two-year history. For July, the Fool Port shows an impressive loss of 26.43%, roughly double the NASDAQ's 12.04% loss and way behind the more staid S&P 500's drop of 6.56%. For Wednesday, with a strong move by Medicis (following the late announcement yesterday of a 3-for-2 stock split) and uninteresting overall days for our other seven holdings, we reported a gain of 1.54%, well ahead of the downed market averages. Small recompense, of course, but signs perhaps that things may be turning up following what looks like dramatic overselling in our top growth stocks.

Go back over market history and you'll find the summer often does this to us. Yale Hirsch's historical studies of the market reveal that the period from May 1 to October 31 way, way, way underperforms the period from November 1 to April 30. We're seeing just that sort of selloff this summer, and you could've found a similar thing in the summer of '94... tech stocks got nailed.

Let's look at that time, since it's so similar to this one. In that case, the NASDAQ hit a high of 808.00 on March 21st... three months later, in the heat of June (the 24th), the NASDAQ touched down at 693.30... off 14%. In just three months. And as somebody who owned growth stocks then, owns growth stocks now, and will always own growth stocks into the future, I remember well that volatile high-tech issues were killed over that period. It was extremely ugly, very similar to now.

But where was our future business growth (then and now)? Who's going to make money? Whose stock is going to reflect that? The best long-term answer to my Foolish way of thinking is high technology. The summer of '94 was an awesome entry point into technology growth stocks, and right now we're finding a similar thing this summer. The NASDAQ has dropped from a June 5th high of 1249.85 to today's low of 1017.64 (it closed 25 points higher). That's a drop of 18.6% in less than two months. Similarly, some of America's greatest growth companies have been toasted far, far worse. It's so familiar-looking.

Unfortunately, I read some messages these days from people who have had such a poor two-month experience with the stock market that they may never invest in stocks again. I understand that, and I also pity it; if your first experience with a match as a child was to burn yourself, you're not too eager to light another... but does that mean you should I swear off all fire as an adult? Similarly, should you and I stop flying airplanes following the disasters of ValuJet and TWA in the past several months? We could, I suppose, and certainly we would feel "safer" but the Foolish sensibility suggests to me that the cost of flying pales in comparison to the cost of not flying. And the cost of losing money over a short-term period in the stock market pales in comparison to avoiding stock-market investing over the long term.

You may not find many other media entities expressing similar sentiments, since fear generates bigger headlines and more readers. And certainly our favorite media organizations love to bring on the bears when the market's down (usually a nice sign of a short-term bottom). CNBC featured comments by market-timin' gooroo Elaine Garzarelli yesterday at 1 PM that were extremely bearish; in short time, the NASDAQ lost more than 2 percent. That's a jittery market, willing to pounce on anything that has the faintest bad whiff. Fools who've read my Fribble reacting negatively to Garzarelli's newsletter, "The Garzarelli Edge," will have already anticipated the negative article about her in today's Wall Street Journal... a fine piece. And draw your own conclusions about the market.

Whether we're talking about air travel or equity investing, short-term disasters always make a big splash and then fall back to take their proper place as anomalous footnotes in our enfolding history. Long-term investors have the great fortune of sitting back and watching, and not really worrying. I myself have been disconnected from my computer completely all week, until coming back this afternoon to write up our Fool Portfolio recap. And I can tell you that I am optimistic as ever, and free of worry, and that's because history's on my side... same deal in the summer of '94 (we launched The Motley Fool that summer, in a very "cautious and troubled market").

So as will happen from time to time, the market has treated us extremely unkindly, shrinking our year-to-date gains and so predictably bringing the bears out of the woodwork. "I told you so," they insist, disregarding historic long-term gains for their brief and meaningless moment in the sun (although there's really very little sun -- it's a cloudy day, of course). On the other hand, we get a tremendous number of notes from readers who have found our daily scribblings helpful and comforting in the face of the market decline. Sometimes, institutional -- oops, I mean individual -- investors need some perspective.

In our book, The Motley Fool Investment Guide, our chapter on Folly toward the beginning looks at the investor's two bugaboos: greed and fear. In a rising market, human nature tends to make us stretch for every last dollar we can, and some of us cave in and play options and margin. In a falling market, those who've succumbed to greed quickly rotate to full-fledged fear, fearing they'll lose everything. What do they do? They sell. The market drops further, and the overall result is volatility. They bought too much on the way up, and they sell -- driving the market down harder -- on the way down. Forceful arguments once again for long-term Foolish buy-and-hold investing.

I know people who bought IOMG around the time we did last May (at $2.52) and have been forced to sell out of the position at a substantial loss, despite the close today at $16 3/8. Why? They bought more on margin, played options, and then got margin calls from their brokers forcing them to sell. Noticing IOMG opened today off another $1 3/8 at $14 3/4, I think of those very people... somewhere in there you saw fear (and necessity) forcing weak hands to ante up, and they did. It happens all the time, in every poor market, and it's sad to watch... so terribly unFoolish. But every error serves as a fine example to the rest of us, a lesson learned vicariously.

Even if the market bombs altogether this year or next, we'll be there buying right into the bottom, knowing that the market will always come back, and our stocks back stronger with it. The Wise will continue to offer you their sophistical ramblings and their many-splendored mediocrities. The whole point of this book is to brush off the worldly wisdom, point not up but out at the world around us, and find the next damn winner. Folly forever.

-- The closing words of The Motley Fool Investment Guide

-- David Gardner, July 24th, 1996

Today's Numbers

Day Month Year History

FOOL +1.54% -26.43% 18.25% 120.80%

S&P 500 -0.04% -6.56% 1.74% 36.70%

NASDAQ -0.64% -12.04% -0.94% 44.73%

Rec'd # Security In At Now Change

5/17/95 2010 Iomega Cor 2.52 16.38 550.07%

8/5/94 680 AmOnline 7.27 25.75 254.05%

4/20/95 310 The Gap 16.28 29.50 81.26%

1/29/96 250 Medicis Ph 27.86 44.75 60.62%

8/5/94 165 Sears 28.93 41.50 43.47%

8/11/95 95 GenElec 57.91 79.88 37.92%

8/11/95 110 Chevron 49.00 57.75 17.86%

8/24/95 130 KLA Instrm 44.71 18.63 -58.34%

Rec'd # Security Cost Value Change

5/17/95 2010 Iomega Cor 5063.13 32913.75 $27850.62

8/5/94 680 AmOnline 4945.56 17510.00 $12564.44

1/29/96 250 Medicis Ph 6964.99 11187.50 $4222.51

4/20/95 310 The Gap 5045.25 9145.00 $4099.75

8/11/95 95 GenElec 5501.87 7588.13 $2086.26

8/5/94 165 Sears 4772.65 6847.50 $2074.85

8/11/95 110 Chevron 5389.99 6352.50 $962.51

8/24/95 130 KLA Instrm 5812.49 2421.25 -$3391.24

CASH $16434.53

TOTAL $110400.16

Transmitted: 7/24/96