Fool Portfolio Report
Tuesday, December 31, 1996

by David Gardner (MotleyFool)

ALEXANDRIA, VA., December 31, 1996 -- Well, that was the kind of year we'd love to just keep repeating, annum after annum. With a close up 0.46% Tuesday, the Fool Portfolio recorded a 42.93% gain for the year. The history books will show that this more than doubled the S&P 500's 1996 return (up 20.26% this year) and outdid the Nasdaq (up 22.71%) by more than 20 percentage points.

The year of 1996 was another fine one for the stock market, and an even much finer one for The Fool Portfolio and its credo of buy-and-hold, long-term investing. The bull market year was nice... to double it is always nicer. It was a rocky road (we were up over 100% at one point!), and we made tons of mistakes along the way -- as we always will -- but throw away all those memories (good and bad) and you're left with the unambiguous reality of it all:

Fool 42.93% S&P 500 20.26% Nasdaq 22.71% Typical Mutual Fund 16%ish

It behooves me in this paragraph merely to repeat several of the important things we've said before. First, those returns are AFTER all expenses are deducted -- we're about the only ones we know who show our returns MINUS commissions and other fees. Also, it's our own real money... none of this "model portfolio" stuff. Finally, every trade we made was announced at least one night before we made it, and in most cases we were penalized between 5% and 10% as the market slid away from us (up when we try to buy, down when we try to sell) following our announcements. We're quite confident we could have made our returns look better, were we not Foolish enough to adhere to these self-imposed, self-penalizing standards (a set of standards we created). But why play in the fields of the Wise?

The point is, we're actually not anything special among individual investors. YOU also pay all your commissions and fees. You ALSO are investing real money... not "model" greenback funny money. And you ALSO would have suffered the 5% to 10% changes in the market, if you were following our particular trades. That said, we unfortunately are something special in the institutional world. The institutional world generally doesn't show trading expenses, it's mainly investing other people's money, and trumpets its recommendations after it's already loaded up on its stocks. And it still routinely loses to the market. And it still views the education of the individual investor as the greatest threat to its existence.

Meanwhile, we'll keep whistling silly, happy tunes on this side of the fence, along with the several hundred thousand others among you. And we'll bring on hundreds of thousands more to our merry troop in 1997, as The Motley Fool -- all of us together, collectively -- continues to reform a troubled Wall Street by emphasizing education, accountability, performance, openness, honesty, and service. Such simple principles... but so difficult for an entrenched establishment that's been getting fat by doing the opposite for decades.

I began by writing that this was the kind of year we'd like to clone, over and over. We know that years in which our portfolio will rise in excess of 40% are special... and we've just put up two in a row. So I'll remind any of our few readers at this point that need such reminding that these times are well above-average, and we shouldn't allow our expectations to ratchet up to any new level. Eleven percent is the historic market return... plan for that, and be grateful when you do better.

We'll never forget 1996 for about thirty-four different reasons, reasons numerous enough that it would be too laborious here to recount them all. It was the year that Iomega soared, dived, and then flattened... but still closed up 114%. Hated by the media (which taught us how little it understood about equity analysis throughout -- an fructiferous lesson for individual investors everywhere), beloved by Silicon Valley and Internet users (many of whom had bought the products before they won all the awards), Iomega remains a living tutorial about stock-market investing. (I still have yet to see anyone do an article analyzing how this company actually moved its sales from $150 million to over $1 billion in two years.)

The past year featured a grand total of only 8 days in which we carried out transactions on the portfolio. To wit: we bought what would be a big winner, Medicis, on 1/29; we shed a big loser, Applied Materials, on 5/2; we made our Foolish Four switch on 8/2; we swapped 3Com in for The Gap two weeks later, 8/13; we ditched Medicis on 9/13; we shorted Quarterdeck at the end of September, 9/27; we bought the ill-fated ATC Communications nine days before Halloween, 10/22; and we closed the year by covering our Quarterdeck short at a 22% gain on December 3rd (it's down more, from $5 1/2 to $4 1/8 since). And that was really all. We didn't spend a lot of time trading in 1996, and don't expect to in 1997. We have other fish to fry, and we know you do too.

We did spend a lot of time learning, however. We became much better acquainted with the fantastic networking industry through our October purchase of 3Com; put that together with our growing knowledge of storage technology, via Iomega, and there you have two great computer-related industries to follow going forward.

We were endlessly fascinated by the twists and turns of our AOL stock; the online medium remains our most compelling business subject today, and AOL is at the forefront. An understanding of the company is a great asset, and our America Online message folder remains the best place to go to learn from a variety of expert commentators, many of them "laymen," and very Foolish ones at that. (You had to read around a fair amount of junk from unpleasant people in that folder this year... we expect next year to be better.) The sturm und drang now having concluded (for 1996 anyway), we find AOL stock was actually down this year: off 11%. Too bad... we could've done even better. Ah well, that bodes quite well for next year, in my mind... this stock at these prices looks like a great long-term keeper.

We watched the bottom drop out of KLA Instruments, which was OK, because we're patient investors. The stock -- brilliantly timed by us and our cost basis of $44.71 -- reached as low as $17 1/2 in mid-September. Yuck! But lo and behold, it closed today more than double that price. Ah, the fickle market... the way to avoid that fickleness is buying and holding and not really caring. Get this: KLAC was up 36% this year, well ahead of the S&P 500 and Nasdaq. Who'd a thunk it? It's enough to give ATC Communications investors some hope.

Back to New Year's stuff. Tom and I wrote a Happy New Year letter to our readers, which contains one of the few market predictions you'll ever see us make. While other Fools on our staff offer a spate of Foolish thoughts with their New Year's Resolutions (each one is a gem on its own). And for our annual hot daytrader's tip, read on, because it's right here:

Like every January 2nd, look for a great day from the new Dow Dividend stocks on Thursday. Every year, a fair number of people activate the Foolish Four approach the first day of the new year, which generally causes $1 or better rises in the new Dow Dividend picks. Look for strong days, therefore, from General Motors, 3M, AT&T, Chevron, and probably International Paper (the lowest-priced Dow high-yielder) as well. If you're like us, of course, you don't do the Dow approach on the first day of the year, partly for this reason. But it's kind of funny to watch anyway, as the institutions jump all over themselves to make El Switcho.

Finally tonight, I spent a bit of time reading our two previous end-of-the-year writeups, and came away with a little insight. We're getting longer-winded. Two years ago on this day, our writeup was 691 words. Last year, 1414 words. A recent Fool recap, one of the longest ever written (I hope), tipped the scales over 2100 words. For a one-day writeup, that's quite amazing. It's also probably more than you want to handle.

Thus, suffice it to say that my own New Year's Resolution is to be more concise. Call me Mr. Terse for now on. (Is that AOL screenname taken up yet? Hmmm.) Mark Twain once wrote (and I've always loved this line, because it's so true): "Sorry I wrote you such a long letter, but I didn't have time to write a short one." With his humorous contrary flare, Twain strikes the anvil of truth: it takes more time to be economical. That's time I'm going to spend.

I look forward to 1997 as much as I have to any year. And I think you should too. The New Year is pregnant with possibilities, and I'm extremely excited. Our cups will runneth over, in so many enriching ways. Whatever the heck the market does.

Fool on!

David Gardner, December 31, 1996


Stock Change Bid -------------------- AOL --- 33.25 T - 3/4 43.38 ATCT - 3/8 13.25 CHV -1 1/2 65.00 GM + 1/8 55.75 IOM +1 3/8 17.38 KLAC - 1/2 35.38 LU - 1/2 46.25 MMM -1 3/4 83.00 COMS -1 7/8 73.25
Day Month Year History FOOL +0.46% -8.62% 42.93% 166.88% S&P 500 -1.74% -2.15% 20.26% 61.59% NASDAQ +0.25% -0.12% 22.71% 79.26%
Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.38 589.77% 8/5/94 680 AmOnline 7.27 33.25 357.18% 8/13/96 250 3Com Corp. 46.86 73.25 56.32% 8/11/95 125 Chevron 50.28 65.00 29.26% 8/12/96 110 Minn M&M 65.68 83.00 26.38% 8/12/96 130 AT&T 39.58 43.38 9.59% 8/12/96 280 Gen'l Moto 51.97 55.75 7.27% 10/1/96 42 LucentTech 47.62 46.25 -2.87% 8/24/95 130 KLA Instrm 44.71 35.38 -20.88% 10/22/96 600 ATC Comm. 22.94 13.25 -42.23% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 34923.75 $29860.62 8/5/94 680 AmOnline 4945.56 22610.00 $17664.44 8/13/96 250 3Com Corp. 11714.99 18312.50 $6597.51 8/12/96 110 Minn M&M 7224.44 9130.00 $1905.56 8/11/95 125 Chevron 6285.61 8125.00 $1839.39 8/12/96 280 Gen'l Moto 14552.49 15610.00 $1057.51 8/12/96 130 AT&T 5145.11 5638.75 $493.64 10/1/96 42 LucentTech 1999.88 1942.50 -$57.38 8/24/95 130 KLA Instrm 5812.49 4598.75 -$1213.74 10/22/96 600 ATC Comm. 13761.50 7950.00 -$5811.50 CASH $4600.04 TOTAL $133441.29 Transmitted: 12/31/96