Fool Portfolio Report
Friday, October 18, 1996
by Tom Gardner (TomGardner)
ALEXANDRIA, VA., October 18, 1996 -- Whether you like Ross Perot or not, whether you think he's a diminutive lunatic or modern-day saint, if you scrutinize his numerical work on money matters in the United States, you'll have a difficult time finding many flaws in his basic premises.
Now this is no political endorsement. To my mind, the Reform Party would best operate and is best considered an active, public advisor to both political parties, regardless of the election. But political commentary is not our game, nor will it be, so let me reiterate, before considering one basic Perotian money principle below, that the passages that follow are apolitical -- as is our service; both are designed solely to help the common Fool with the sensible management of her savings money.
For the sake of simplicity, let's dumb down all of Mr. Perot's analyses into a single consideration: the contentious battle between dollars of debt and dollars savings. Each of us faces very difficult choices about how to manage our financial affairs. Mortgages, credit-card and leasing agreements contend with paychecks, IRA plans, and savings accounts. Debt-free profitability scoffs at indebted growth (or worse) and vice versa.
The principles that underlie both arguments are plainly evident -- the former bespeaks long-term discipline, the latter implies short-term gratification. To be certain, the average human needs a good healthy dose of both of these. Which way the seesaw leans and how far, however, is pretty consequential.
But the struggle between red and black ink is hardly just a personal matter. This classic sport is played on corporate, state and federal fields, as well. Some corporations borrow heavily to grow, like Time Warner with $17.5 billion in long-term debt. Others generate growth out of the internal flow of profits, like Microsoft with $7 billion in cash and no long-term debt.
A related Microsoft/Fool note:
1. Tomorrow afternoon at 3:30 PM EST, I will appear on MSNBC to talk about the process at big retail investment firms of simply lifting hundred-dollar bills from private-investor accounts -- and naming them commissions.
Now, what horrifies the Reform Party is our nation's slippery-slope engagement with compounding out growth on debt, indefinitely -- with no design for reducing it more expediently than eventually. It is one thing to embrace debt for infrastructural investment, fashioned to reap substantial reward in the future. 'Tis quite another to just embrace debt.
On the personal finances plane, consider that many individuals use high-rate, plastic debt not as a future-growth vehicle. Gasp. There are stories of individuals using credit-card cash to purchase state-lottery tickets. Good gracious. The former charges 18% interest per year. The latter methodically claims 50% of the "investment." This amounts to rapid self-disintegration, inspired by active marketing campaigns.
We assume, no, that the nation sees right through the marketing smoke and mirrors, understanding how burglarious these lotteries are? Apparently not. New York State posted $3.6 billion in lottery ticket sales in 1995, paying out only $1.8 billion in winnings. That's just 50 cents returned on every invested dollar, or 50% daily losses. That makes the common bear market look dreamy.
But far worse than the immediate or even intermediate-term losses borne out of indebtedness are the compounded ones. That growth in deficits personal, corporate, state and federal is what petrifies Mr. Perot. Remember that the very same compounding-growth equations we use to generate savings growth from index-funds, or the Foolish Four, or growth stock investing can and should be used on the side of debenture.
A few months ago, I compounded out $1 in savings at a rate of 20% annual growth for one hundred years. That 20% is two percentage points shy of the 25-year returns from The Foolish Four. It bewildered many Fools, and certainly startled me, to see that at that rate, one dollar will expand into $82.8 million. In the 101st year, it will add another $16.5 million. That's starting with one dollar!
Unfortunately, life is not all peaches and roses. The same dollar of debt at 20% will swell to obligations of $82.8 million in a hundred years. Without plans to turn that debt into growth, the borrower falls into a grimmer misery. After year one, he only owed $1.20. He laughed when after year two he only owed $1.44. In the 61st year, though, he lost $11,300. In the hundred-and-first year, that borrowed dollar lost him the same $16.5 million that it would have gained him on the savings side.
Compounded federal, state, corporate and personal debt is what bewilders Mr. Perot and the Reform Party. "Growth off a Growing Base" -- it's a basic business and money principle that should have been and should be taught in grade school. It is one of the greatest satisfactions we and our staff have had in our 2.5 years online. Ask MFs BulDog, Buckley, Runkle, DrRap, and Pixy over in our Fool's School what warms their hearts most about this enterprise. I suspect they'll cite guiding youth out of borrowing and into saving. And all this whilst the media worries about the potential for a 10% decline on the Dow over the next six months!
In The Fool Portfolio today, we were blessed by Iomega's strong 3rd quarter earnings annoncement, which drove the stock up a dollar to $23 7/8. While margins dropped, and the company is burning cash as it brings the Penang factory up to speed and builds inventories for the retailing season, clearly this challenging quarter was a healthful one for the Company.
With its dream team of Intel, Motorola and Texas Instruments in place, with OEM agreements accounting for 10% of total sales, and with its brand reaching into new corners of the globe every day, Iomega to me looks poised to trade up to a projected year-end PEG price above $35 a share. Mr. Market often illustrates how underlying value gets compromised for short- and intermediate-term price games, though. So, make no short-term price targets!
The Fool Portfolio did not make its purchase of ATC Communications (NASDAQ:ATCT) today. The stock opened up $2 3/4 and only dipped back a dollar during the day. The Fool considers this an artificial, short-term construct in pricing. We have another four days to pony up our cash for these shares. We're patient.
David did much of the fine research on ATC Communications. I hope you read his ATCT transaction report. It certainly has raised some eyebrows in Fooldom and livened up conversation over in our ATC stock folder. This stock is traditionally PEGged around 1.00, but the belief is that estimates are unrealistically low for this rapid-grower.
I look forward to learning more about this company and stock in the days ahead. David certainly makes some convincing arguments. As Philip Fisher wrote (paraphrased), "Making the initial investment isn't the biggest step. The great challenge is to become, over time, something of an expert in the business and to make determinations about how long and how loyally to commit to the enterprise."
As always, we plan to invest less than 12% of total assets in this issue, in our ongoing effort to maintain an initially-balanced and market-beating portfolio.
To close, The Fool Portfolio rose 1.70% on this Friday. We're still trailing the S&P 500 for the month of October, and we don't like that one bit. Our returns are sitting just short of 50% for 1996 and just short of 180% since August, 1994. Consider us a Fool sitting atop a mountain with slippery slopes on either side. Behind us lies the slippery slope of growth in indebtedness. In front lies the equally slippery slope of growth in savings.
We plan to keep stepping forth with you, Fool.
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Stock Change Bid ------------------- AOL + 1/8 25.38 T + 1/4 40.00 CHV + 5/8 67.50 GM --- 53.25 IOMG +1 23.88 KLAC +1 24.25 LU - 1/8 47.50 MMM + 1/2 72.50 QDEK + 1/16 6.19 COMS --- 62.88
Day Month Year History FOOL +1.70% -1.98% 49.62% 179.38% S&P 500 +0.54% 3.42% 15.41% 55.07% NASDAQ +0.04% 1.27% 18.09% 72.52% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.88 847.81% 8/5/94 680 AmOnline 7.27 25.38 248.90% 8/11/95 125 Chevron 50.28 67.50 34.24% 8/13/96 250 3Com Corp. 46.86 62.88 34.18% 9/27/96 -890 Quarterdec 7.08 6.19 12.66% 8/12/96 110 Minn M&M 65.68 72.50 10.39% 8/12/96 280 Gen'l Moto 51.97 53.25 2.46% 8/12/96 130 AT&T 39.58 40.00 1.07% 10/1/96 42 LucentTech 47.62 47.50 -0.24% 8/24/95 130 KLA Instrm 44.71 24.25 -45.76% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 47988.75 $42925.62 8/5/94 680 AmOnline 4945.56 17255.00 $12309.44 8/13/96 250 3Com Corp. 11714.99 15718.75 $4003.76 8/11/95 125 Chevron 6285.61 8437.50 $2151.89 9/27/96 -890 Quarterdec -6304.75 -5506.88 $797.88 8/12/96 110 Minn M&M 7224.44 7975.00 $750.56 8/12/96 280 Gen'l Moto 14552.49 14910.00 $357.51 8/12/96 130 AT&T 5145.11 5200.00 $54.89 10/1/96 42 LucentTech 1999.88 1995.00 -$4.88 8/24/95 130 KLA Instrm 5812.49 3152.50 -$2659.99 CASH $22563.12 TOTAL $139688.75 Transmitted: 10/18/96