Fool Portfolio Report
Tuesday, August 6, 1996
by Tom Gardner
ALEXANDRIA, VA, August 6, 1996 -- America Online and Medicis hit the wires with news today that drove the value of their companies northward---and by extension, The Fool Portfolio.
This morning, AOL announced the acquisition of The ImagiNation Network (INN) from AT&T. Terms of the deal were not announced. The ImagiNation Network, the developer of multiplayer games like Red Baron on Sierra Online, will continue development of CyberPark, a gaming area on the Internet, as well as launching new offerings on AOL's proprietary system.
Multi-player games take advantage of the interactive spirit of networked computers---taking players out from the solitary confines of dimly-lit offices, rulebooks, boxed software packages, midnight doughnut runs, and competition against Hal, the supercomptuer, and dropping them into a dynamic environment of global communication, competition, and doughnuts at midnight. The move by America Online to pick up this wholly-owned subsidiary of Ma Bell was well-received by the market. AOL closed up $1 to $34 1/8.
Medicis Pharmaceuticals announced fourth-quarter earnings that initially baffled the market. MDRX did not break out their 4th quarter from fiscal year results in the announcement. Couple that with the 3-for-2 stock split and a load of tax credits, and you have a market in this issue that was notably more inefficient than usual. Followers of George Soros would maintain that the market is always dynamic, complex and inefficiently priced. Today's jumble of numbers, splits and credits provided a perfect illustration of 't.
Rather than bore you with a second short analysis of Medicis' 4Q and year-end performance numbers, I'm linking in our information package on the announcement including the numbers and a short analysis: 8/6/96: The Medicis Report. The information is also accessible via our mainscreen and will sit in our Medicis collection of articles in the listbox above to the right. We don't yet have a report back from the conference call, which began at 4 PM, but you can expect one from MF Debit sometime this evening.
Closing up $1/4 to $35 1/2, Medicis has risen 91.13% for us since we dove in with both eyes opened in late January, 1996. We continue to believe that small-cap stocks can measurably outperform the 22% annualized growth that The Foolish Four Dow stocks have doled out since 1970. The performances of present holdings America Online, Iomega and Medicis Pharmaceuticals would seem to support our claims. The performance of KLA Instruments and Sonic Solutions---which today underperformed estimates by 26 cents---would seem to refute our claims. I hope our concentration on highly-profitable, unleveraged small businesses in dynamic industries will prove beneficial.
To conclude, my mind's still stuck on that single dollar of yesterday's report that when compounded at 22% growth yearly bloomed into $354 million a century later. At the end of the century, you'd have to pay those long-term capital gains rates of 28%. Time for a good tax lawyer, otherwise you're out $99.3 million in taxes. But who's really counting at that point---we're talking about a single George Washington. With the taxes removed, your hundred-penny investment grew to $255.2 million.
A couple points worth noting here.
At the end of your first decade, your dollar had inched forward to a mere $5.98. You felt small. By year twenty, you only had $43.73. Whoop-tee. But then, between years eighty and ninety, you turned pre-tax profits of over $41 million. And between the 99th and 100th year, your profits were $63.9 million.
$63.9 million. In a single year. Off an initial investment of one dollar.
Your investment portfolio is a business. The greatest businesses see $354 million in the value of a single dollar. Whether the business is Microsoft, with over $10 billion in total assets and $6.9 billion of that in cash, or Oscar's long-term savings account, with $1400 in it growing by $50 per month. Just the $50 at a Foolish-Dow growth rate would swell into $17.7 billion in a hundred years.
You can't generate those returns if you don't save the bucks. You can't run a dollar over $350 million if you pull it out before one-hundred-years time. With the Dow high-yield approach in operation for you, what matters is that you concentrate on savings, that you account for the returns on all of your investments professionally, and that you eschew capital investments that will not outperform the Dow group---and particularly those that are more speculative, more time-intensive, and more unnerving.
Yesterday I talked to a close friend of mine who is not yet investing her money. She said to me, "I only have $3,000 saved. What good would that do in stocks?"
Forty years of Dow investing in a tax-deferred account will turn it into $7 million, over $5 million after taxes. Now, you can't draw on it before then. And you'll have to resign yourself to the tedium of method---big, high-yielding companies. As well, don't expect to win any annual investment contests or find your face on the cover of Fortune magazine. And when the market crumbles, your portfolio might well disintegrate with it. Can you wait patiently through a 40% correction in the Dow in year 27?
If all of this seems bearable, here are the decade-by-decade returns for those $3,000. They remind us that it doesn't matter where you start, with $20 or $140 or $1200 or $4300. It only matters that you start.
Year 1: $3000 Year 10: $17,900 Year 20: $131,200 Year 30: $958,000 Year 40: $7,000,000 Year 50: $51,139,000 Year 60: $373,552,100 Year 70: $2,728,660,000 Year 80: $19,931,862,000 Year 90: $145,594,907,000 Year 100: $1,063,517,135,000
The long-term value of a single dollar should not be underrated by your business, your portfolio. I'm not proposing a halt on new spending. This isn't the diet that radically alters our life. It isn't that 2-hour-a-day exercise plan that we can't possibly maintain. It's not flossing our teeth every evening. It isn't keeping all of our papers filed, all of our books shelved neatly in a row. Sixty years of rotating the initial $3,000 investment into the Dow's highest-yielders---if the growth rate continues---makes for over $370 million, or $268 million after taxes.
Be your own company committed to making more than you spend, to not borrowing heavily, to longer-term horizon lines, common sense, and the wit and wisdom to know how you little you know and how great of a Fool you are.
--- Tom Gardner, August 6, 1996
Day Month Year History FOOL +0.78% 7.53% 32.06% 146.59% S&P 500 +0.33% 3.50% 7.54% 44.50% NASDAQ +0.74% 4.48% 7.29% 56.75% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.63 599.69% 8/5/94 680 AmOnline 7.27 34.13 369.21% 4/20/95 310 The Gap 16.28 32.88 102.00% 1/29/96 375 Medicis Ph 18.57 35.50 91.13% 8/11/95 95 GenElec 57.91 86.50 49.36% 8/5/94 165 Sears 28.93 42.88 48.23% 8/11/95 110 Chevron 49.00 59.38 21.17% 8/24/95 130 KLA Instrm 44.71 19.88 -55.55% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 35426.25 $30363.12 8/5/94 680 AmOnline 4945.56 23205.00 $18259.44 1/29/96 375 Medicis Ph 6964.99 13312.50 $6347.51 4/20/95 310 The Gap 5045.25 10191.25 $5146.00 8/11/95 95 GenElec 5501.87 8217.50 $2715.63 8/5/94 165 Sears 4772.65 7074.38 $2301.73 8/11/95 110 Chevron 5389.99 6531.25 $1141.26 8/24/95 130 KLA Instrm 5812.49 2583.75 -$3228.74 CASH $16754.13 TOTAL $123296.01 Transmitted: 8/6/96