Fool Portfolio Report
Tuesday, December 24, 1996

by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA., December 24, 1996 -- On this quiet evening, imagine viewing the earth from outer-space; picture it large and blue and soft, and the rugged brown continents, and the blue seas -- all the globe glowing in the darkness surrounding it. On that world below are more excited and sleepless children than on any other night of the year. Millions of children restless and impatient, tossing and turning, eager but quiet. So many are waiting for the first crack of dawn in order to run down the hall, wake up mom and dad, and see what Santa brought.

Now, from out in space, zoom in on the globe. Zoom in tight and tighter, the world growing larger, and then zoom down on North America. Focus on the east coast, then on New York, then on New York City. Enter past the clouds and suddenly see the large buildings sprawling, curving across the horizon with the rounded earth, lights glowing in the night, buildings arcing upward into the sky, glittering with life; zoom in on a penthouse, the top floor of a Manhattan building. Hover above the building, then move forward, floating, and look into the large penthouse window.

There you see a very expensive penthouse, beautifully decorated, a perfect Christmas tree, its soft lights glowing. A well-dressed man tells his wife he'll be to bed soon, then goes to his den and sits at his desk. He lights a cigar and thinks a while, then begins to write a letter in the late evening:

"December 24, 1996

"Dear Fund Owners,

"Another year has come and gone so quickly, and our diversified mutual fund increased its shareholders by several hundred, while the net asset value of our fund increased substantially, as well. The markets were strong this year. Not as strong as 1995, but still very strong. We are happy to announce another positive year, and another year in which close attention to the market and acting upon that attention enabled us to grow your money substantially. We're very pleased with our 14% gain year-to-date, not much under the 22% or so the markets have managed thus far. As the average gain one can expect per year is 10% or so, we've beaten that once again, and our shareholders should be very happy, as we are.

"As you probably don't understand the market or the complex investing world, and probably don't have the capability or time to understand it, I'll tell you what happened this year, and how it affected your money and your fund. Many of the strange events in the market this year are responsible for our performance which, while strong, could possibly have been stronger. (But this should serve as a reminder: most funds and investors can not beat the averages, dear Fund Owner. The averages are very difficult to beat, as the market is difficult to call. But not calling the market at all, well, what a disaster that could be for you, Fund Owner). So, a look at some of our work the past 14 months:

"To prepare for 1996, in November and December of 1995 we began to sell some of our bond positions and load up on stocks, especially small caps stocks, as December usually offers a Christmas rally, and January follows with the January Effect, in which small-caps usually rally to begin the New Year. In 1996 though, small caps, and indeed most stocks, fell in January. Therefore, admittedly surprised, we lightened our position in late January as the stocks were getting hit. We entered our positions again, though, many of them, prudently in February as things were looking better.

"But as March ended and April progressed, we began to lighten our positions again as May is historically not the strongest month for us, and we didn't want to be too invested in stocks at that time. Also, we heard other fund managers, respected managers, were buying heavy into bonds, and we felt the market was overvalued, and so we were buying bonds, too, for your protection. April proved a surprise, though. Corporate earnings were strong, and the market in April and May began to make continuous new highs. We invested late into this time period, buying into the strength to keep your money at work for you. We bought into the summer, as well, as summer, though often quiet, usually presents a "summer rally."

"Summer, though, as you may or may not be aware of, was a surprise, and turned ugly. The Dow lost about 10% at one point, and the Nasdaq much more. Perhaps 17%. Suffice it to say, we had a correction this summer, and we were invested at the time enough to hurt our performance substantially if we had stayed invested as we were, and if stocks had continued to go down. So, we sold some stock positions in mid-summer, for your protection. We bought bonds and T-bills with the new capital. The market appeared to have finally broken, and meanwhile we all expected another move from Chairman Greenspan. Job growth was strong.

"In the Fall, we divested a further good portion of our stocks throughout September, as October is usually a very poor month, and the November election was, everyone expected, going to present further downside potential in the market. It was well known the market would likely suffer a correction after the election. Most casual investors such as yourself would not know the history behind this phenomenon, but you don't need to know. We know it for you. We protected your money by putting 15% of the fund in bonds and 10% in cash.

"After the elections, the market moved upward, strangely. We didn't act on it as we didn't think it would last. We thought it was a "sucker rally," as they call it on Wall Street. It's a very complicated thing, truthfully. But the market did not tire itself out, and as it made new highs, we began to take more positions. We have bought stocks throughout the last six weeks of 1996, even though in December we saw some market selling after our buying at higher prices. But we are again prepared for another January Effect this coming January. Though it didn't happen last year, that only makes us suspect it is more likely to happen this year, and it should present a good start for our mutual fund.

"After our hard-earned success of 1996, the fee for our mutual fund is increasing a scant one and a half percent for the new year, to pay the managers for their work. All this past year, they worked diligently to give you 14% gains on your money, and it was not an easy year for any market professionals, as you can surely see. The market really pulled a few punches on investors this year, but our professionals kept their cool, while individuals probably would have been forced out of the market entirely at the worst of times.

"Again, your money, if you had it with us all this year, gained 14% (11.3% after fees). At 11%, you grew your money with us better than can be expected on a historical annual basis.

"We appreciate your business and wish you the best of 1997 with us.


Mr. I.M. Funds
Mutual Funds Limited
Chairman and Fund Co-Manager"

The man reads his letter again, then stands and stretches while thinking of his trip in two days to the Canary Islands. How nice those three weeks will be, he thinks to himself. He switches off the light and turns to the door of his den. There floats, ethereal and glowing, a ghost. The man does a double-take. The ghost is still there, floating and looking at him.

The Ghost of Wall Street Future.

Sir, before long, the ghost states, his voice sounding so ghostly and unreal that it isn't granted quotation marks; before long you'll no longer be so richly rewarded for underperforming the averages. Wall Street professionals will face consequences for poor performance, just as the rest of the world must. Investors would have been much better served invested in an index fund than with you, sir. And yet you make millions. Where else in the world are people so brazenly rewarded while underperforming the simple averages? No where. No place. Even Midas offers a rebate if your muffler is not installed correctly. And so it will be with Wall Street one day, one day in the near Future, as people realize what is fair and what is not. You, sir, will not get rich by the mere pooling of masses of money, using it to underperform the averages, but then still skimming off the top. What a mis-service you are doing to the people. Your business will not last!

The Foolish Four has gained 30% this year! And it gains on average 22% per year, handily walloping the market, and therefore, you!

Then the ghost vanished, leaving the man alone.

Of course, within a month the man quits his job, goes Foolish, and even donates much of his money to charity and children. Consider, while so many children are happy and excited this Christmas Eve, still about three out of five persons in the world subsist on less than $1.50 per day, and millions of children are hungry tonight, more than they are excited. Remember what the season is about: giving. And then remember that throughout the year, always. Giving of yourself is the best you can do on this planet. The fund managers in the news today, who are getting bonuses more substantial than most the annual salaries of the people in this world...(mainly because the market rose)... well, at least perhaps they'll give some back.

Happy Holidays to all...Foolishly.


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Stock Change Bid -------------------- Stock Change Bid -------------------- AOL - 1/2 36.38 T +1 3/8 41.38 ATCT - 5/8 11.63 CHV - 1/2 65.50 GM - 3/8 55.25 IOM - 1/8 17.88 KLAC + 1/2 35.75 LU - 1/8 46.13 MMM + 1/4 84.75 COMS - 3/8 76.00
Day Month Year History
FOOL -0.70% -6.96% 45.53% 171.75% S&P 500 +0.55% -0.79% 21.93% 63.84% NASDAQ +0.64% -0.39% 22.38% 78.79% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.88 609.62% 8/5/94 680 AmOnline 7.27 36.38 400.15% 8/13/96 250 3Com Corp. 46.86 76.00 62.19% 8/11/95 125 Chevron 50.28 65.50 30.26% 8/12/96 110 Minn M&M 65.68 84.75 29.04% 8/12/96 280 Gen'l Moto 51.97 55.25 6.30% 8/12/96 130 AT&T 39.58 41.38 4.54% 10/1/96 42 LucentTech 47.62 46.13 -3.13% 8/24/95 130 KLA Instrm 44.71 35.75 -20.04% 10/22/96 600 ATC Comm. 22.94 11.63 -49.32% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 35928.75 $30865.62 8/5/94 680 AmOnline 4945.56 24735.00 $19789.44 8/13/96 250 3Com Corp. 11714.99 19000.00 $7285.01 8/12/96 110 Minn M&M 7224.44 9322.50 $2098.06 8/11/95 125 Chevron 6285.61 8187.50 $1901.89 8/12/96 280 Gen'l Moto 14552.49 15470.00 $917.51 8/12/96 130 AT&T 5145.11 5378.75 $233.64 10/1/96 42 LucentTech 1999.88 1937.25 -$62.63 8/24/95 130 KLA Instrm 5812.49 4647.50 -$1164.99 10/22/96 600 ATC Comm. 13761.50 6975.00 -$6786.50 CASH $4291.89 TOTAL $135874.14 Transmitted: 12/24/96