Fool Portfolio Report
Friday, August 23, 1996


by David Gardner (MotleyFool)

ALEXANDRIA, VA, August 23, 1996 -- On the strength of further advances from Medicis and Iomega, The Fool Portfolio reversed the market's downward move Friday, posting a gain of almost one percent. That left us with a pretty decent market-beating week overall, up 1.63% vs. gains in the S&P 500 and Nasdaq of 0.27% and 0.88% respectively.

Back in the saddle again.

You know, I've been occasionally bummed out in recent months, following the cutting in half of our two biggest-weighted stocks. With the decline in the NASDAQ, and the more dramatic selloff of technology stocks, we've had the mispleasure of watching America Online drop from $70 to today's close of $31 3/8 (down $1/4 on the day). Iomega has been treated worse: its close today (up $1/2) at a bid of $15 3/4 is about 70% off its high of just a few months ago.

(Fortunately, as of market close today, we're still up 27% for the year, over the market's 8.5%.)

But flying home from our appearance on CNN two nights ago, I had occasion to open up Investor's Business Daily to a few pages that I almost never look at: THE MUTUAL FUND PAGES! At the time, our portfolio had declined to just a 20% gain for the year overall... a few months ago, we were showing completely outrageous returns over three figures. Dolefully paging through IBD, my spirits brightened as I was reminded once again of the utter mediocrity of our mutual fund industry. Noting the market's gain this year of 9%, I looked in vain for any funds significantly outperforming that figure. The vast majority (and a long and depressing list it is) were below 9%; some were at or slightly above it; a few were sporting returns of 14% or 15%. None that I could see showed 20% or more, other than a few concentrated sector funds.

I actually like PBHG Growth fund, because they're fairly Foolish over there and have been serving up market-beating returns (as every fund should -- or at least more than 20% of them) for years. But PBHG is up just 7% this year. Investor's Business Daily has a Mutual Fund Index which tracks the overall performance of some of America's best traditional funds (PBHG among them). As of today, the best-performing is up 16% (Berger Small Company fund), though only a minority (12 of the 23) are level with, or exceeding, the market.

Among the majority of losers is none other than the Alger Small Cap fund, managed by a fellow named David Alger. The fund is down about 10 percentage points this year, in keeping with its underperformance of the S&P 500 over the past three years, and over the past five years. But, as the man behind the curtain says, "That's not all!" You see, like all Alger open-ended funds, it comes with a "redemption fee" (a.k.a. back-end load, a.k.a. "surprise, we're taking your money when you sell!") of slightly more than FIVE PERCENT... enough to make even thick-skinned investors not want to bag out of this fund, despite its market-losing returns. Worse, the fund's annual expense ratio, according to an article in Mutual Fund magazine, runs more than twice the industry average... so they're over there spending a bunch of your money marketing themselves, it appears, to say nothing of paying themselves.

This is not character assassination; for all we know, this guy Alger is a stand-up individual in his community, probably donating enough of his annual salary to keep afloat a number of local non-profits. No, it's performance assassination, what we're trying to teach newcomers to the financial markets all about. As long as entities like the Alger funds are rooking investors on their expenses, and managing to underperform the market over its one-year, three-year, and five-year returns, you're going to hear the Fools teaching people to cash out their shares and at the very least move the money to index funds (Vanguard's S&P 500 index fund, which we write about in our book, is just one of a number of examples). No surprise that you'll find few people in the mutual fund industry (or their apologists, like Money magazine) speaking kindly of Fools. Education has always threatened mediocrity.

Ultimately, the idea is to teach you how to manage your money by investing directly in stocks, but please, no hurry here. Avoiding Algerlike gigs (these guys are giving Horatio a bad name) is just the first obvious step.

The irony here is of course that in past TV interviews featuring Alger (who appears from time to time on CNBC), he's been quite critical of you and me, that is, those who use the online medium to learn how to manage their money. Is this surprising? He'd much rather you didn't, of course! "Please, please, please, puh-leeeeez don't learn how to evaluate performance," we can hear the man crow. (And then a whisper, "Don't redeem!")

But hey, you have to celebrate mutual funds in one sense; for better or worse, at least they put up their returns every day. No obscuring of their performance. Others have something to learn from that example.

I want to close by mentioning, as many of you now know (kinda hard to miss the media coverage of this item), that we have partnered this week with NASD Regulatory to distribute its online pamphlet "Hot Tips Can Burn" to guide novice investors to make safe and proper use of this medium, learning to identify and avoid hype or misinformation. You can find that bright yellow HOT TIP! button in various spots around Fooldom.

Regular readers know that from the day we did our Joey Roman story two and a half years ago (now immortalized in Appendix C of our book), we've fervently worked to kick the junk off of online services. It's wonderful to have a wing of the Nasdaq now on our team, wearing Fool ballcaps. That's a major reason why from day one we've never opened message folders for stocks under $5 per share; we don't want Fooldom to attract the unpleasant element desirous of manipulating thinly traded stocks. From our initial contact with the superb president of NASD-R, Mary Schapiro, we recognized that this partnership dovetailed delightfully with our ongoing overall mission of teaching people how to manage their money Foolishly, increasingly with the help of this amazing and powerful medium. The Motley Fool will remain a haven for those who wish to avoid rumor mongering.

We have also encouraged the NASD to read our message boards and maintain a quiet, beneficial presence in Fooldom. The aim, as always, is to serve you better by making our message boards useful. Discouraging unethical brokers wishing to dump junk stocks on an unwitting public is only one of many features of interactive Foolishness.

Fool away your weekend!

--- David Gardner, August 23, 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.

Transmitted: 8/23/96

Today's Numbers

Day Month Year History FOOL +0.94% 3.67% 27.32% 137.74% S&P 500 -0.54% 4.23% 8.30% 45.51% NASDAQ -0.14% 5.72% 8.57% 58.61% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 15.75 525.26% 8/5/94 680 AmOnline 7.27 31.38 331.40% 1/29/96 375 Medicis Ph 18.57 39.00 109.98% 8/11/95 125 Chevron 50.28 59.88 19.07% 8/12/96 110 Minn M&M 65.68 66.00 0.49% 8/12/96 130 AT&T 54.96 54.63 -0.61% 8/12/96 280 Gen'l Moto 51.97 51.13 -1.63% 8/13/96 250 3Com Corp. 46.86 44.00 -6.10% 8/24/95 130 KLA Instrm 44.71 20.88 -53.31% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 31657.50 $26594.37 8/5/94 680 AmOnline 4945.56 21335.00 $16389.44 1/29/96 375 Medicis Ph 6964.99 14625.00 $7660.01 8/11/95 125 Chevron 6285.61 7484.38 $1198.77 8/12/96 110 Minn M&M 7224.44 7260.00 $35.56 8/12/96 130 AT&T 7144.99 7101.25 -$43.74 8/11/95 280 Gen'l Moto 14552.49 14315.00 -$237.49 8/13/96 250 3Com Corp. 11714.99 11000.00 -$714.99 8/24/95 130 KLA Instrm 5812.49 2713.75 -$3098.74 CASH $1379.61 TOTAL $118871.49 Transmitted: 8/23/96 7:16 PM