Fool Portfolio Report
Monday, October 28, 1996
by David Gardner (MotleyFool)
ALEXANDRIA, VA, October 28, 1996 -- As we are in the midst of autumn, and as autumn is the time of football, and as the Washington Redskins (our local team) are 7-1, I was thinking of pigskin a fair amount over the weekend.
And eureka, dear reader, because it came to me all of a sudden: Foolishness and gridiron success are perfectly analogous.
No, I'm not suggesting that Tom and I would fare well against 300-pound defensive tackles, or could stand the heat of an NFL pocket closing. (Both of us did coincidentally start on league-winning high school football teams from different schools -- but what am I, bragging? No... this was rinky-dink small-private-school ball.)
What I'm suggesting is that your portfolio should look a lot like an NFL football team.
Let me make this clear, and I'll use our portfolio to do so. We have 11 stocks -- a goodly number of holdings; it just so happens that every play, NFL football teams put 11 men out on the field. Coincidence? Not really. And the comparisons only begin there. You see, Foolishness is a successful offense. (We don't invest defensively.) Listen up, dear Fools.
For starters, what is any offense's foundation? We all know it, even if the media mercilessly hypes quarterbacks. Every offense's foundation is its offensive line. It will come as no surprise to our informed readers that at The Motley Fool, our foundation is the Dow Dividend Approach. Is it merely coincidental that the companies we buy through that approach are the same behemoths, the same butterballs, the same 325-pound California redwoods you find on any NFL offensive line? I think not.
So let us assign our first few positions in the Fool Portfolio. Starting at center, we have none other than General Motors (which dropped $1/4 today). GM is the penultimate profit prospect, the Dow dominator whose shares we double our dollars down on. To that end, it anchors our line, it is our focus, it touches the ball every play. GM is coming off a recent holdout following contract difficulties, but has performed pretty well upon its return.
The guys flanking GM -- our guards and tackles -- are obviously our other scale-tippers. On the right side we'll put our ablest linemen: Chevron and 3M Corp. 3M plays guard, of course, since he needs to be more mobile (as a pulling lineman) than our right tackle, Chevron. Chevron is after all three times the size (measured by revenues) of the nimbler 3M. And as these two have been our top-performing Dow picks this year, we're comfortable running behind them the majority of the time. They're up for all-pro honors, in fact.
On the left side of the line sit AT&T and Lucent. Both have revenues in excess of $20 billion, and are underperforming the guys on the other side. That said, these two have worked together pretty well in the past, so they make a good trapping tandem. Goes without saying that Lucent's at left guard.
Look down our line, then, and you see hugeness: right to left it's Chevron, 3M, General Motors, Lucent Technologies, and AT&T. They're heavy, they don't move too quickly, and you better hope they don't sit on your head. We've founded our team on these bonecrushers.
(We didn't get much from 'em today: Chevron's $1 1/4 loss was offset by 3M's continued $7/8 rise, following Friday's outstanding record earnings with net margins over 10%. The left side of the line, AT&T and Lucent, each lost about a buck.)
Most football teams also play with a sixth scrimmage-hugger, a down lineman who swings between blocking sled one play and ball-grabber the next. We're talking about the tight end. We imported our guy from France: it's Trois Com. 3Com is the perfect tight end, combining a couple billion in sales with outstanding speed (94% annualized share-price return over the past five years). Football fans, picture Kellen Winslow. Or maybe we should select Dwight Clark, insofar as the big D used to grind it out over the green blades of 3Com Park. (Though I'm not sure Dwight had quite the speed we're looking for.) Anyway, you get the point. In your portfolio, you gotta have a tight end who can hit and catch passes.
OK, so who's taking snaps from GM? Who's flipping post-pattern passes 3Com's way? No surprise there. Iomega is our quarterback. Not only is IOMG (soon to be IOM, apparently) the most important guy out there, he's also -- like quarterbacks in general -- the most overrated in his importance.
Iomega is responsible for about 30% of our offense, which means he is indeed the single greatest contributor to our team's performance. Our Foolish football team is certainly darned grateful we drafted this swell-looking stud from the amateur ranks last spring. At the same time, the media often represents Iomega -- and again, quarterbacks in general -- as "the whole team," as if the performance of our offensive line or other ball-touchers don't matter. "Iomega is the Fool Portfolio," some people say, just as you might hear a slack-jawed gridiron nincompoop characterize a given weekend contest as "Elway vs. Marino." Sure, sure.
Anyway, last year our quarterback put up one of the greatest rookie performances the league has ever seen. His second year has also been superb. Our general manager expected as much when he selected IOMG early in the first round last year. Good to see our scouting pay off.
We run a two-back offense at Fool HQ. Sometimes they line up in an "I" formation, other times we split 'em, and we've been known to send one or the other in motion on occasion. Our halfback is the second best athlete on the team, America Online. He won a Heisman Trophy in 1992, took Rookie of the Year honors the season after that, and in 1994 and 1995 AOL made All-Pro. This year he got off to his best start ever before getting repeatedly keyed on by short-selling linebackers, who then downed him in the middle of the campaign. The result? Knee surgery, following a blown-out medial collateral ligament. Maybe we should blame it on our fullback.
You see, the performance of your star running back is due in no small part not just to his offensive line, but to his blocking fullback (right, Emmitt Smith?). So you can imagine how difficult it's been for AOL to gain much yardage this year with KLA Instruments down in a three-point stance in front of him. Throughout the late 1980's and '90's, KLA was a veteran back on another team, much sought after. We finally picked him up late last summer in an expensive trade. Suffice to say, hindsight demonstrates that we (over)paid top dollar. The guy showed up in training camp overweight, possessed little desire, and despite some impressive fundamentals, KLA just couldn't get it done out on the field.
Our backfield hurt our team this summer, as we were hobbled and lost a bunch of games. Monday morning quarterbacks have urged us to trade 'em both for a few months now, but we don't run our team according to the whims of Monday morning quarterbacks. As neither of these two has suffered career-ending injuries, we continue to believe AOL and KLAC may bounce back. (AOL lost a buck today, while KLA Instruments surrendered $3/8. AOL holds its annual meeting on Halloween, and Fools will be in attendance to report back. The company has also apparently scheduled a separate conference call sometime tomorrow.)
Catching passes for this team will be our speedy movers, ATC Communications and Quarterdeck. On any football team, you want to combine speed with size and power, so it's no surprise we enjoy the presence of these two volatile performers. We actually obtained ATC Comm in a straight-up one-for-one deal for Medicis Pharmaceutical (Nasdaq:MDRX). We sent MDRX to the Houston Oilers, obtaining Texas-bred ATCT earlier this month. The guy can fly, and has very good hands. (ATCT, which was up more than $1 in the morning, closed down $7/8. The company's slated to announce earnings this week, though Investor Relations won't let on as to whether it's Tuesday, Wednesday, or Thursday. As always, stay tuned.)
Quarterdeck has been around a bit longer, and has made our fans very happy. While he also has good speed, the guy possesses absolutely horrible hands. Still, he's gotten the job done for us. In fact, both our wide outs have been great assets to the portfolio. (Quarterdeck, which was up a quarter early today, gave that quarter back in the afternoon -- we ain't making him quarterback, though -- and closed unchanged, enroute to hitting a new all-time low in the last hour of trading.)
OK. Game over!
The points, I hope, are evident. A good equity portfolio looks exactly like a good offensive football team. You build a heavy-duty foundation, mix in some dependable stars, and always make sure you have a few speedy guys to go long from time to time. Every stock is a roleplayer, and you need to maintain balance.
I've met people whose whole portfolio is one big offensive line. They're typically older investors who've put up uninspiring returns for years through mutual funds or bonds or yesterday's players (say, IBM). Their quarterback is as big as the guy he takes snaps from; you coudn't tell their flanker and their tackles apart in a brightly lit room. They don't lose money; they just don't win many games. Can you say, "Arizona Cardinals" or "Tampa Bay Buccaneers"?
I know investors whose savings are invested purely in lightweights and scatbacks. Underestimating the importance of beef in the trenches, these people end up with a list of speed-demons whose lack of size and speed make them highly susceptible to injury. The American Football Conference has featured portfolios like this for years; the AFC also hasn't won a Super Bowl for a decade. I'm thinking Seattle Seahawks.
Oh yeah, finally, who is it that our team lines up against every weekend? Simple. The indices. Their teams feature huge size and power, but are a tad light on speed, to say the least. That huge size and power causes many commentators to predict they'll win every game: "The indices can't be beaten," these Wise guys proclaim. But insofar as we value speed, and actively recruit it and mix it into our "skill positions," we've beaten the indices every single year we've lined up against 'em.
And we believe that if you take the time to draft a similar team with your portfolio, you will too.
Down... set... hut one... hut two... Fool on!
--- David Gardner, October 28, 1996
Stock Change Bid ------------------- AOL -1 24.63 T - 1/2 35.88 ATCT - 7/8 23.13 CHV -1 1/4 66.00 GM - 1/4 53.88 IOMG - 3/8 21.63 KLAC - 3/8 24.25 LU -1 48.75 MMM + 7/8 75.25 QDEK --- 5.63 COMS + 7/8 63.50
Day Month Year History FOOL -1.48% -5.11% 44.85% 170.47% S&P 500 -0.53% 1.44% 13.20% 52.11% NASDAQ -0.55% -0.90% 15.56% 68.83% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 21.63 758.49% 8/5/94 680 AmOnline 7.27 24.63 238.59% 8/13/96 250 3Com Corp. 46.86 63.50 35.51% 8/11/95 125 Chevron 50.28 66.00 31.25% 9/27/96 -890 Quarterdec 7.08 5.63 20.60% 8/12/96 110 Minn M&M 65.68 75.25 14.58% 8/12/96 280 Gen'l Moto 51.97 53.88 3.66% 10/1/96 42 LucentTech 47.62 48.75 2.38% 10/22/96 600 ATC Comm. 22.94 23.13 0.82% 8/12/96 130 AT&T 39.58 35.88 -9.36% 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 43466.25 $38403.12 8/5/94 680 AmOnline 4945.56 16745.00 $11799.44 8/13/96 250 3Com Corp. 11714.99 15875.00 $4160.01 8/11/95 125 Chevron 6285.61 8250.00 $1964.39 9/27/96 -890 Quarterdec -6304.75 -5006.25 $1298.50 8/12/96 110 Minn M&M 7224.44 8277.50 $1053.06 8/12/96 280 Gen'l Moto 14552.49 15085.00 $532.51 10/22/96 600 ATC Comm. 13761.50 13875.00 $113.50 10/1/96 42 LucentTech 1999.88 2047.50 $47.62 8/12/96 130 AT&T 5145.11 4663.75 -$481.36 8/24/95 130 KLA Instrm 5812.49 3152.50 -$2659.99 CASH $8801.62 TOTAL $135232.87