Fool Portfolio Report
Monday, September 23, 1996

by David Gardner

ALEXANDRIA, VA, September 23, 1996 -- Continuing its upward swing, the Fool Portfolio kept alive its streak of seven straight days of 1% or greater returns with a Monday tally of +1.14%. A tasty $7/8 rise in Iomega coupled with flatness in the rest of our stocks (on a bad day for the Nasdaq) conspired to help us beat a down market.

"The Blizzard of '96," they called the storm that dropped more than two feet of snow on the East Coast in the course of 48 hours last January. Then recently, the damage wrought by Hurricane Fran in the Carolinas may qualify it for Hurricane of the Century, once that mess is finally disentangled. Here in Fooldom, we've seen our own strange weather. Call it the Tempest of '96. Fortunately, while it's been occasionally catastrophic, the overall result of our Tempest is sunny skies and green profits. Reminds us of why we prefer stocks so much to beach-front real estate.

The Tempest has been absolutely amazing to watch. At the close of May, the Fool Portfolio displayed overall 1996 returns of an astounding 101.91%, vs. gains in the Nasdaq and S&P 500 at that point of 18.18% and 8.64%, respectively. That may be the greatest five-month performance in the history of the Fool Portfolio: I refer not to the past here, but to the future. Ad infinitum.

Then, over the course of a month and a half from mid-June to late July, we watched our annual gains drop from 84% to 24%. In six measly weeks! We eventually saw a weekly closing low of 20.26% on September 6. Now, the Tempest winds have blown back our way, the Fool Portfolio having since gone on to almost double its 1996 returns. Today's close put our numbers for the year like this:

FOOL 39.94% NASDAQ 15.14% S&P 500 11.45%

It was the Bard himself (in Othello) who wrote:

If after every tempest come such calms,
May the winds blow till they have waken'd death!

As usual, I quite agree. For those with the mentality for it (I being one), volatility is not bad. In fact, it's quite good. As the market historically goes up and up and up, courting volatility can help you go up, up, and upper. Volatility is a primary reason why our returns have beaten the S&P 500 by more than 28 percentage points this year, and 111 percentage points in our two-year history. But this ain't just any volatility. It's Foolish volatility, implying that you're buying shares of top-notch growth operations that are highly profitable, with new products, high growth rates, expanding margins, the works. Not penny-stock volatility... rather, the sort of volatility that Michael Jordan demonstrates when he scores 32 points one night, and 60 the next.

Certainly, investing Foolishly in dynamic growth stocks is not for everyone, and we must all decide to what we're best suited. During the downturn, we saw some very unfortunate behavior among a minority of contributors to our message boards. The behavior ran the gamut from vindictive bearish comments to the cyberequivalent of falling on one's sword. These are people without the proper mentality for stock-market investing; if you are one such, we'll continue to recommend our Foolish solution for you, namely to put your money away in an equity index fund and leave well alone making your own decisions. You'll do just fine, earning the stock market's annual average return, and lotsa smart people are doing it. Investor's Business Daily pointed out recently that $4 billion was added to index funds in 1994... in 1995, that figure was thirteen billion dollars. As of the end of last year, 9% of all the money in mutual funds was in index funds; expect that percentage to continue rising as our efforts and the efforts of others educate the general public about its money.

You can read our SmartMoney column in November for more of our feelings on mutual funds.

To close, regarding the tempestuous: I was paging through IBD today and came across an interesting tidbit. Namely, Berkshire Hathaway (NYSE:BRK.A) currently holds a relative strength of 1. (I refuse to believe this, by the way.) Relative strength, you'll recall, attaches a numerical grade (just like the one Mr. Bernard used to scrawl on your sixth-grade pre-algebra tests) to a stock's price performance over the past twelve months (weighted more toward the latest quarter). BRK.A gets an F.

Even though I think the 1's a typo, it does remind us that great stocks and great investment approaches have their bad periods. Berkshire class A stock has a high $38,000 and a low of $28,850, a spread of more than 30% high to low. The stock currently sits at $32,500, which means that over the past year you could have had your money in many, many better places. Buffett, worshipped by the investment world (and rightly so, in general), doesn't always have a good year, eh? But I doubt he allows tempests to change his investing rules. Sticking to one's approach while waiting out the bad times can be difficult, but is often one of the few important factors that separates good investors from bad ones.

There's a part of me that celebrates Berkshire's decline, mainly because many people blindly (even somewhat arrogantly) buy that stock and other big names, confidently stating that the future will continue to replicate the past. This ain't the way to invest, people... do your own homework, make your own decisions, and recognize that we live in a world of dynamic and constant change. I dedicate my own time to locating the next great thing, not the previous one. Heck, Buffett himself has talked down Berkshire as an investment for months... Buffett fans could've noted this and put their money elsewhere. (Not that that's a good formula for long-term success; over the long term, BRK has rocked.)

OK, no real news today for Fool stocks. Potentially important for tomorrow is that IMP Inc. (Nasdaq:IMPX), which derives 12% of its overall business from Iomega, had its trading halted at market close today when it announced substantial losses for the current quarter. This certainly confirms more clearly than ever that Iomega is working its way through a bad three-month period, but one cannot really know to what extent Iomega's 12% biz brought about IMPX's difficulties. For all we know, Iomega's 12% portion is the best thing IMP has going! Who knows? We'll keep our money on the J.P. Morgan and Hambrecht & Quist analysts who recently revised their numbers downward -- but kept them profitable -- presumably after a few private phone calls with well-placed IOMG management.

Iomega has taught a lot of us many lessons, good and bad (though ultimately good, since all lessons and all education are to the good -- one can never invite in too much light). I appreciated some recent contributions to our Iomega folder from MF Chiros, which I read in our IOMG in Fooldom Today message-board summary feature. Once again demonstrating his consummate understanding of the beauty and value of this medium, and with characteristic humility, Charles wrote:

"I am not happy about my analysis and my actions in May-July. I have suffered over an 80% loss from the peak. I had thought that Iomg's story was all but clinched already. If the story (next generation floppy) is intact, this company is worth $100, no doubt. If the story is not intact, this company is probably worth $10-$20. The 2Q shortfall and summer slowdown has put a damper on the story. Consequently, there has been a drastic fall. I was not able to foresee this. So, I suffered along with many of my friends. In fact, I would be better off today if I had just stuck with my initial investment in Iomg back in Mar. 1995 rather than trafficking in options and margin as I became more and more bullish. So, I suffered from my decision.

"I am, and have always been a long-term bull. Now, it's true I've been bearish for the short term since July. But, I hope this board is not about cheerleading. I am after truth, not cheerleading. I am not always right. But, let the logic in the analysis stand for itself. If a bear makes a good case, I am grateful. I hope this board can be a useful place for people looking for information and analysis distilled from many working together to put the mosaic in perspective.

"Just one more thing. I have warned people in the past not to listen to my posts, but to think for themselves. My failing to foresee the summer slowdown proves only too clearly my fallibility. If this board is looking for a cheerleader or an infallible prophet, then I am indeed disqualified from participating on this board. But, as an added voice in analysis, I hope to be able to contribute to this board."

So true so many ways. Not only do we once again hear of the mistake of investing in options and margin (and it takes a strong man to confess his private disappointments with them), but we are reminded once again of the power of message boards for you and me. The aim is never to promote, never to tout, never to attack, never to mock, never to anger, never to misinform. The aim is to learn. And there's no better way to learn than by working together with thousands of other contributors who can arrive at a full picture of that "mosaic" to which Charles refers. What is the mosaic? Quite simply, it's a more deeply informed viewpoint than any other medium could ever possibly develop for its adherents. My thanks to Charles for his insight, and his continued presence in Fooldom.

With 12% of our own money currently in cash, we are hard at work identifying at least one short to add to the Foolfolio before the close of September.

--- David Gardner, September 23, 1996

Today's Numbers

Day Month Year History FOOL +1.14% 10.63% 39.94% 161.30% S&P 500 -0.08% 5.29% 11.45% 49.76% NASDAQ -0.67% 6.13% 15.14% 68.22% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 18.75 644.35% 8/5/94 680 AmOnline 7.27 34.00 367.49% 8/11/95 125 Chevron 50.28 62.50 24.29% 8/13/96 250 3Com Corp. 46.86 57.00 21.64% 8/12/96 110 Minn M&M 65.68 70.00 6.58% 8/12/96 130 AT&T 54.96 57.25 4.16% 8/12/96 280 Gen'l Moto 51.97 48.75 -6.20% 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 37687.50 $32624.37 8/5/94 680 AmOnline 4945.56 23120.00 $18174.44 8/13/96 250 3Com Corp. 11714.99 14250.00 $2535.01 8/11/95 125 Chevron 6285.61 7812.50 $1526.89 8/12/96 110 Minn M&M 7224.44 7700.00 $475.56 8/12/96 130 AT&T 7144.99 7442.50 $297.51 8/11/95 280 Gen'l Moto 14552.49 13650.00 -$902.49 8/24/95 130 KLA Instrm 5812.49 2730.00 -$3082.49 CASH $16258.37 TOTAL $130650.87 Transmitted: 9/23/96