Fool Portfolio Report
Monday, November 18, 1996


by Jeff Fischer MF BudFox)

ALEXANDRIA, VA, November 18, 1996 -- Over the weekend, the Russian space program launched a six-ton rocket into space. Intended destination: Mars. Actual destination: Pacific Ocean, in 18,000 feet of water.

Sunday, as it was realized the mission had failed to leave Earth's orbit, the space probe was expected to crash in east-central Australia. What caused this drastic underperformance? Who knows. Who is directly accountable? Good question. How does it relate to the Motley Fool? Easily.

If the stock market was "Earth" and mutual funds were "space probes," a good 85% of them would crash back to earth and end up somewhere below sea level -- badly underperforming. Australia -- and the rest of the world -- would be forced to hold emergency meetings every single day as mutual funds continuously crashed to earth due to underperformance.

Now, imagine the Soviet Union back in the early 1980's, in the heat of the Cold War. The Communist country would have done everything in its power to keep this failed space mission from the world. And, back then, if the rocket had crashed in a remote part of Australia, but the Mars probe vehicle had survived and the outside world was ignorant to the disaster, the Russians may have reported to the masses, in Arnold Schwarzenegger tone, "Our superior space probe mission has reached Mars in less than 12 hours. We have live video-feed. We show Mars does have life-forms. It is populated with thousands of kangaroos."

How many millions of people would have believed this? (Ouch). Too many. As it is with mutual funds and their fancy advertisements.

Mutual funds: they underperform because they can afford to. The face they show the world through marketing is the face that matters to them, and as long as they spend "x" amount of dollars in advertising, they can afford to underperform the market, because they'll still bring in "x" amount of dollars in revenues from new clients and fees, as Tom wrote about last Thursday.

Who suffers because of this? Those who suffer are the Americans who invest in the thousands of underperforming funds. That's unfortunate, because you don't need to be rocket scientist to invest well -- though many who make their living in the industry of course portray it as very difficult -- i.e., "You need a professional to invest your money for you."

Wrong. But the most difficult part for many may be figuring which strategy to use when investing on their own.

If you stop by your local bookstore you'll see literally hundreds of books about the stock market and investing. There are thousands of strategies written about. Some are more effective than others, and some are not effective at all. But many are very "involved," confusing, overly-written, and not to the point. The point is to beat the market. If you can't beat the market simply and easily, you may as well be in an index fund. But the goal for Foolish investors is to beat the market, simply and easily. Which is where the Foolish investing strategy parachutes gently to the rescue.

The Fool's core investing technique is very simple: the Foolish Four. There is little in the world that could be more simple than the Foolish Four. Yet recently on CNBC, a full-service broker said investors shouldn't try the Dow Dividend Approach (the approach closest to the Foolish Four) on their own, stating they "may not have the discipline for it." Ha! And Mars is over-run with kangaroos -- how insulted should we be?

Since 1971 the Foolish Four has returned 22.23% per year on average, handily trampling the Dow Jones Industrial's 12.79% average annual return the past 25 years (with dividends included). And this mere 12.79% is a number which 85% of mutual funds can not beat. Foolish AOL 3.0 users and Motley Fool Web readers, check out these numbers.

The following table compares the returns on a $10,000 investment in 1971 in the Foolish Four with a similar investment spread across the entire Dow. The return figures include dividends but exclude commissions and taxes. Year Foolish $10,000 Cumulative Dow 30 $10,000 Cumulative Four Return Return ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1971 22.98% $12,298 23% 9.06% $10,906 9% 1972 17.58% $14,460 45% 16.70% $12,727 27% 1973 35.25% $19,557 96% -10.86% $11,345 13% 1974 2.67% $20,079 101% -16.91% $9,427 -6% 1975 82.20% $36,585 266% 44.24% $13,597 36% 1976 53.23% $56,058 461% 31.28% $17,850 79% 1977 1.98% $57,168 472% -13.44% $15,451 55% 1978 8.12% $61,810 518% 2.52% $15,840 58% 1979 5.43% $65,167 552% 11.34% $17,637 76% 1980 46.63% $95,554 856% 25.31% $22,101 121% 1981 -1.56% $94,063 841% -3.26% $21,380 114% 1982 47.88% $139,101 1291% 19.59% $25,569 156% 1983 35.20% $188,064 1781% 35.63% $34,679 247% 1984 7.40% $201,981 1920% 0.51% $34,855 249% 1985 38.20% $279,138 2691% 29.77% $45,232 352% 1986 28.43% $358,497 3485% 21.69% $55,043 450% 1987 2.28% $366,671 3567% 11.96% $61,626 516% 1988 3.43% $379,248 3692% 13.72% $70,081 601% 1989 9.04% $413,532 4035% 31.97% $92,486 825% 1990 -15.06% $351,254 3413% -9.20% $83,977 740% 1991 89.34% $665,064 6551% 31.48% $110,413 1004% 1992 28.77% $856,403 8464% 10.96% $122,514 1125% 1993 37.80% $1,180,123 11701% 17.96% $144,518 1345% 1994 -6.70% $1,101,055 10911% 3.73% $149,908 1399% 1995 37.19% $1,510,537 15005% 35.28% $202,796 1928% Compound Annual Growth Rates from 1971-1995: Foolish Four 22.23% Dow 30 w/Div. 12.79%

$10,000 invested in the Foolish Four strategy beginning in 1971 would now be worth over $1,510, 500, a 15000% return. AND, the Foolish Four takes one hour of work per year, if that. It requires no fancy office, no suit and tie contacts, no polished shoes and polished smile, and no extra commissions or fees. Yet, you outperform the market.

The resulting difference between outperforming and merely matching the market is huge, not to mention how detrimental underperforming the market is to your returns.

Earning 22% per year in the Foolish Four, as opposed to simply matching the market: since 1971 your $10,000 invested in the Foolish Four is now a cool $1.5 million. That same $10,000 invested in a vehicle which merely kept up with the Dow Jones Industrial Average grows to only $202,000. And if you underpeformed the market 85% of the time the past 25 years, of course your money would be much less than $202,000. The Foolish Four being so easy and historically so profitable, it's difficult to see the argument for keeping money with big money managers and buying mutual funds when 85% of them underperform. You'd have to be from Mars to not see the value of outperforming the market.

As for today, the Fool handily outperformed the market, climbing 0.72% on the day, up 50.50% since January 1st, and up 181% in the last two years and three months, or so. While the Fool was up, the markets were down. The S&P 500 lost a fraction, and the Nasdaq was down 0.57%. If the Nasdaq was a space mission, it failed.

Interestingly, three Fool stocks were separately presented with awards today. 3Com (COMS) won PC/Computing's 1996 Most Valuable Product Award. The publication selected a 3Com external ISDN modem for top honors in the ISDN adapter category, beating out co-finalists Ascend Communications and U.S. Robotics. Separately, the current issue of Business Week has an interesting article about the growing networking market in small business, titled Wiring Small Business.

3Com has formed a small-business unit strictly to serve customers with 100 or fewer employees. Their watchword: simplify. If customers can't get 3Com "simplified" local area network (LAN) product set up and running in 15 minutes or less, 3Com will reimburse them. Hmm. They may be overestimating the computer savvy of some morons such as myself.

Also winning awards in PC/Computing today, America Online (AOL) won best online service, and Iomega (IOM) won best new product, with the Jaz drive. The publication called the Jaz revolutionary, in that the product itself created an entire new market, and of course dominates that market.

Iomega also announced today that NEC Computer Systems will offer Zip drive options for coming notebook computers. And finally, also today, Iomega announced IomegaReady Software, a software developer program which will allow the saving of large files from the Internet, for example, directly onto their Zip or Jaz drives. The network will recognize the presence of a Zip or Jaz drive, and save to those disks rather than using finite hard disk space.

Whatever the awards are worth, it's great to have three companies in the Fool portfolio winning them. It must mean the companies are not only doing things right, but leading the world in what they do.

Finally, I'd be remiss if I didn't mention that Fool short Quarterdeck (QDEK) announced two new products today at Comdex. Technically savvy Fool, Thom Unger (MF Wind), considered them briefly. One product is an update of an older version, which received fair reviews but would not make or break any company, and the other is a new product, a Rapid Remote Control program which provides remote computer access. It isn't revolutionary and holds a limited market, and a market with competition. I wish Quarterdeck the best in the long-term, but it doesn't appear they've accomplished what it takes to turn them around yet, by any means.

To close, ATC Communication's recent conference call is available here in the Earnings Central.

See you tomorrow, when the Fool will be reporting live, from Mars!

Be Foolish....

TODAY'S NUMBERS


Stock Change Bid ------------------- AOL --- 27.25 T - 1/4 37.13 ATCT + 3/4 16.50 CHV + 1/4 65.88 GM + 1/4 55.75 IOM + 1/2 23.00 KLAC -1 5/8 29.38 LU +1 1/4 49.75 MMM +1 1/8 82.38 QDEK + 1/8 4.81 COMS -1 1/2 70.75
Day Month Year History FOOL +0.72% 3.72% 50.50% 181.01% S&P 500 -0.08% 4.50% 19.66% 60.78% NASDAQ -0.57% 2.71% 19.24% 74.20% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.00 813.07% 8/5/94 680 AmOnline 7.27 27.25 274.68% 8/13/96 250 3Com Corp. 46.86 70.75 50.98% 9/27/96 -890 Quarterdec 7.08 4.81 32.07% 8/11/95 125 Chevron 50.28 65.88 31.00% 8/12/96 110 Minn M&M 65.68 82.38 25.42% 8/12/96 280 Gen'l Moto 51.97 55.75 7.27% 10/1/96 42 LucentTech 47.62 49.75 4.48% 8/12/96 130 AT&T 39.58 37.13 -6.20% 10/22/96 600 ATC Comm. 22.94 16.50 -28.06% 8/24/95 130 KLA Instrm 44.71 29.38 -34.30% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 46230.00 $41166.87 8/5/94 680 AmOnline 4945.56 18530.00 $13584.44 8/13/96 250 3Com Corp. 11714.99 17687.50 $5972.51 9/27/96 -890 Quarterdec -6304.75 -4283.13 $2021.63 8/11/95 125 Chevron 6285.61 8234.38 $1948.77 8/12/96 110 Minn M&M 7224.44 9061.25 $1836.81 8/12/96 280 Gen'l Moto 14552.49 15610.00 $1057.51 10/1/96 42 LucentTech 1999.88 2089.50 $89.62 8/12/96 130 AT&T 5145.11 4826.25 -$318.86 8/24/95 130 KLA Instrm 5812.49 3818.75 -$1993.74 10/22/96 600 ATC Comm. 13761.50 9900.00 -$3861.50 CASH $8801.62 TOTAL $140506.12 Transmitted: 11/18/96