Fool Portfolio Report
Tuesday, August 20, 1996
(FOOL GLOBAL WIRE)
SOHO, Ny., August 20, 1996 -- Disappointment on the 20th day of the month, as Fool stocks dropped 3.33% led by heavy down days from Iomega Corporation, America Online and 3Com Corporation. Just about every other Fool stock gave back a little as well, except for 3M which rose $7/8 on the day.
Iomega Corporation continues to shock and disappoint investors since it went back to the public markets for more capital with JP Morgan underwriting and the stock bounding around $40 a share. Since that offering, the stock has been mauled by investors. Today found it down an additional $1 1/4 to $13 7/8. Once trading as high as $55 a share earlier this summer, IOMG -- the ticker symbol known at every trading desk in the nation -- has given back 70% of its value.
Did they fail to meet SEC reporting requirements? No.
Has there been a serious management shakeup? No.
Is there an investigation into their accounting procedures? No.
Has there been any notable news? No.
This is to say, very simply, that traders on Wall Street have been playing some monster games with this issue since its secondary. Certainly the same thing was happening, to a certain extent, on the way up. Momentum players climbed aboard the train. And literally thousands of newbie investors, buying what they heard was good fifth-hand, put their "play" money to work in I-O-M-G.
Momentum is a two-way street. The cheering section on one side is only different in jersey colors than the cheering section on t'other. On Wall Street, momentum either way generates excitement, trading commissions, market-making spreads and creates that lotto-bucks sense that piles of money can be made in an instant. Value is defined in paper terms. . . not business terms.
Walk through the trading desks on the Street---as MF Networx did and reported back on in an excellent Fribble---and you'll soon realize that much of the daily and weekly activity is predicated upon paper trading hands, deals being struck, things happening. I would say that 99% of the people who write of and speak of Iomega today have little or no idea of what business the company is in, how profitable and how defensible its products are, what challenges face it going forward, the like.
You have your indication of market-tops and market bottoms. When self-professed experts analyze stocks whose businesses they don't know, boom. You're into paper-trading. Peter Lynch wrote that it is always the institutional side of this business that is more speculative and less research oriented, not the side of the individual investor. Not surprising. The brokering side of the business is trained to sell ideas, not research them. The mutual fund industry is incentivized to get more money under management, not to beat the S&P 500. Let me illustrate that point:
I open up the Baldheaded Mutual Fund and collect $100 million to manage. My fee? 1% of total assets. That's $1 million. Now let's say the market rises 10%, and my mutual fund rises 10% as well, without any additional funds. With $110 million under management, I now take in $1.1 million. Meeting market average earned my business an additional $100,000. Had I doubled up on the market, earning 20% for the year, I'd have landed $1.2 million, off a base of $120 million.
Fools, it will not take me very long to realize there's a much better way to play this game.
I begin using bucks to ADVERTISE. My marketing program is top-notch. The Baldheaded Fund is sold everywhere---over the phone, in banks, out of brokerage houses, during football games, in financial magazines and newspapers, et cetera. You name the place, and we're looking to sell our mutual fund out of it.
I quickly attract another $150 million to manage. I now have $250 million in the fund. Let's stick with that 10% performance for the S&P 500 and give my mutual fund a 0% return for the year. Still at those 1% fees, lookie there, I just earned $2.5 million, fully $1.4 million more than the Baldheaded Fund would have had I concentrated on beating the market. So, you see, the challenge is to grow assets under management more than it is to outgrow the market averages.
The best way to make money managing mutual funds is to MARKET, MARKET, MARKET. In a nation where individuals have literally no financial education, why concentrate on percentage point returns or beating the market. Most of our nation has no idea what that means. Consequently, you see management fees rise even as fund performance lags. And why not? No one's looking.
All of this is to say that most of the investing community does not have its brain attending to the underlying value of businesses like Iomega. The business structures motivate them to focus on other things. I think the PEG on Iomega is incredibly appealing right now. At $14 a share, I think there's a double sitting out here over the next year, as earnings numbers coming flowing through. Just as the market lost touch with reality on the upside, sending the company's value up by yelling out a ticker symbol and the word, "Buy," so too has it now lost touch with reality on the downside.
We're certainly willing to wait for the picture to clear up as earnings come flowing through. I understand and appreciate the frustration of others who have more active approaches to the market---they would prefer that we try to project performance week-to-week, month-to-month. Unfortunately, our expertise lies not in making short-term projections but in studying businesses and focusing on long-term values.
Thus, we can do no better---lowly Fools that we are---than to invest no more than 10% of our savings account in any one stock upfront, to eschew the price analysis of the options trader, to avoid borrowing to fund growth (margin), and to accept that to beat the market soundly over the long-haul---a noble aim, I think---you have to be willing to embrace the businesses that make up the stock market over the long haul.
Late January, 1997. That's less than six months out. With their storage devices racing out of computer stores, Iomega at $14 a share will look cheap. Not that there isn't risk here. There are no guarantees. Business conditions can change. And the market, of course, is often badly inefficient over the short run. But if they just keep plugging away at their business in Roy, Utah, I can't help but see a stock that does not reflect the intermediate- to long-term value of this enterprise.
That's our mission with this portfolio---to beat the market decades going forward. It certainly isn't the only way to invest. I believe it to be the best, but I won't force that on anyone. Everyone, however, should be accounting for their performance professionally. Cause if you can't beat Beating the Dow with zero research and negligible risk. . . why keep trying?
--- Tom Gardner, August 20, 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 -3.33% -1.94% 20.43% 124.88% S&P 500 -0.13% 4.02% 8.08% 45.22% NASDAQ -0.55% 4.09% 6.89% 56.17% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 13.88 450.82% 8/5/94 680 AmOnline 7.27 30.63 321.08% 1/29/96 375 Medicis Ph 18.57 34.00 83.06% 8/11/95 125 Chevron 50.28 59.25 17.83% 8/12/96 110 Minn M&M 65.68 68.50 4.30% 8/12/96 130 AT&T 54.96 54.25 -1.29% 8/12/96 280 Gen'l Moto 51.97 51.25 -1.39% 8/13/96 250 3Com Corp. 46.86 42.88 -8.50% 8/24/95 130 KLA Instrm 44.71 19.50 -56.39% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 27888.75 $22825.62 8/5/94 680 AmOnline 4945.56 20825.00 $15879.44 1/29/96 375 Medicis Ph 6964.99 12750.00 $5785.01 8/11/95 125 Chevron 6285.61 7406.25 $1120.64 8/12/96 110 Minn M&M 7224.44 7535.00 $310.56 8/12/96 130 AT&T 7144.99 7052.50 -$92.49 8/11/95 280 Gen'l Moto 14552.49 14350.00 -$202.49 8/13/96 250 3Com Corp. 11714.99 10718.75 -$996.24 8/24/95 130 KLA Instrm 5812.49 2535.00 -$3277.49 CASH $1379.61 TOTAL $112440.86 Transmitted: 8/20/96