Fool Portfolio Report
Thursday, April 24, 1997
by Tom Gardner (TomGardner)
ALEXANDRIA, VA.,(April 24, 1997) -- Overall, the marketplace was relatively calm today. Our Fool holdings fell 0.74%; the S&P 500 was off 0.32%; and The Dow sloughed back 0.30%. Those indices dropped even with the over $11 and 7% gain by IBM, after the technology giant posted another stellar quarter of business.
IBM's earnings numbers remind us again that even when the broader market slumps, great business performance prevails. No story that comes to my Foolish mind supports that notion more than the tale of former Coca-Cola mastermind and CEO, Robert Woodruff.
Believing the market to be substantially overvalued in 1928, Woodruff shorted 6,600 shares of Coke stock to hedge his large long position. And he was right about the market. Over the next four years, it plunged, losing over 60% of its value. And by 1936, stocks were still down 13% since 1928.
But guess what happened to The Coca-Cola Company?
Its capitalization consistently and substantially rose. Though the market fell a total of 13% during that eight-year period, Coca-Cola slammed ahead 291%.
By the early 1930s, its CEO had lost $400,000 on his hedge. Woodruff was forced to close out his short position, to cover his losses by selling a significant portion of his Coke holdings, and to work a second job as CEO of the White Motor Company. Strange as it may seem, in the 1930s, Robert Woodruff was acting as a near-bankrupt CEO both of a car company in Cleveland and of what he would build into one of man's greatest enterprises -- the promotion and sale of caramelized, carbonated, liquified corn syrup.
There's a lesson here somewhere.
Maybe the lesson is that one ought not bet against superior business models, regardless of whether the market looks overvalued. Foolish interpreters of the tale would suggest that investors consider buying slices of ownership in truly world-beating corporations, regardless of market levels.
To my great chagrin, Berkshire executive Charlie Munger puts it more concisely and more eloquently than I can: If you pick the right businesses, the stock price doesn't matter. Fortunately, for Robert Woodruff, he stayed heavily invested in Coke throughout the century, and his charitable donation of KO stock to Emory University in the early 1970s is worth over one billion dollars today.
The best businesses just keep growing.
Microsoft, for example, will probably prove that point during the next significant downturn. Since its IPO in 1986, the stock has risen 120 times in value. Yesterday, when it climbed $5 per share, adding $5 billion in capitalization, its persistent and money-careful CEO Bill Gates added $1.2 billion to his net worth.
In a single day.
The strength of Microsoft's product offerings, the increase in gross margins to a mind-boggling 91% and profit margins to a mind-reboggling 32%, and the simple logic underlying its business model position this outfit as an enduring globe-beater. Do we think a market downturn is going to obliterate Softy?
I don't think so. In the decade ahead, Microsoft will make smaller upfront investments, will benefit from a more effective, digitized distribution network, will see its base of potential customers rise significantly; and it will continue to fashion a low-cost, daily repeat-purchase business. The market may do nothing for a decade. The best business models will continue to unearth fine growth opportunities. I consider Microsoft and Coca-Cola to sit comfortably in that group.
But the follow-along question is... can you find the best business models?
Well, we certainly didn't with ATC Communications, which centimetered up $1/16 today. ATC has fallen 81% for us since October 22, 1996 -- a day to be rued until the end of civilization. ATC Communications has floundered since underperforming estimates last quarter. They're slated to post 3rd-quarter earnings in the next week.
We've been asked by a handful of readers why we don't concentrate more attention on our barking-dog stocks, like 3Com and ATC. Are we trying to sidestep the truth -- it being that we make investing mistakes? Or is it that we're unable to look tragedy in the eye? Or is there some other reason?
I think it's an excellent question, deserving reply. Consider this. In running The Motley Fool business, we do not concentrate much attention on our unsuccessful products. In a good business, they comprise an increasingly smaller slice of total revenues.
The same principle applies to the business of managing our savings money. With around $2600 left to our ATCT position, it makes up just 2% of our total account. Rightfully, it gets no more than 2% of our attention.
Now we don't consider it -- as a profitably growing business -- to be fairly valued by Wall Street today. Because of this, we haven't shown it the door. But in that ATC is inconsequential to the overall performance of the portfolio, we don't spend much time on it. It gets a small helping of food in a plastic bowl with the rest of our dogs.
It bears repeating that we will always have badly underperforming investments in here, as long as David and I are involved in the direction of these monies. Someday, we may let the Horatio-XG4808 supercomputer, that we paid a lot of money for last year, manage the funds. And Horatio may prove flawless. Until then, we'll keep directing our own dollars as we see fit, and we'll continue to suggest that investors should use this window of information as nothing more than a springboard for their own analysis or, alternatively, a stadium for them to rock tomatoes off the belled-caps of lowly Fools.
As it was in the beginning, as it was in the Elizabethan courts, so it must be today. It should never not be that way for Fools. The Wise must do their part; they must overlook performance numbers; they must attempt to obfuscate; they must claim authority; they must strut about demanding respect; they must scoff at motley.
And we must play our part as well -- dodging thrown vegetables, enabling the folly of the Wise, and naming the numerical realities:
Day Month Year History FOOL -0.74% 1.33% -5.96% 150.96% S&P: -0.32% 1.86% 4.11% 68.23% NASDAQ: +0.08% 0.52% -4.87% 70.53%
This. . . with over 85% of equity funds losing to S&P growth of 68.23% since August 4, 1994.
Stay on target for the next five decades!
Tom Gardner, Fool
P.S. We didn't transact on the Donald...yet!
Stock Change Bid -------------------- AOL -1 42.75 T - 5/8 30.88 ATCT + 1/16 4.31 CHV - 3/8 66.25 GM - 3/4 55.50 IOM - 1/2 16.50 KLAC - 3/4 43.38 LU + 3/8 56.00 MMM + 1/8 86.13 COMS +1 1/8 28.63Day Month Year History FOOL -0.74% 1.33% -5.96% 150.96% S&P: -0.32% 1.86% 4.11% 68.23% NASDAQ: +0.08% 0.52% -4.87% 70.53% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 16.50 555.03% 8/5/94 355 AmOnline 7.27 42.75 487.80% 8/11/95 125 Chevron 50.28 66.25 31.75% 8/12/96 110 Minn M&M 65.68 86.13 31.13% 10/1/96 42 LucentTech 47.62 56.00 17.61% 8/12/96 280 Gen'l Moto 51.97 55.50 6.79% 8/24/95 130 KLA Instrm 44.71 43.38 -2.99% 8/12/96 130 AT&T 39.58 30.88 -21.99% 8/13/96 250 3Com Corp. 46.86 28.63 -38.91% 10/22/96 600 ATC Comm. 22.94 4.31 -81.20% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 4945.56 15176.25 $10230.69 5/17/95 980 Iomega Cor 5063.13 16170.00 $11106.87 8/12/96 110 Minn M&M 7224.44 9473.75 $2249.31 8/11/95 125 Chevron 6285.61 8281.25 $1995.64 8/12/96 280 Gen'l Moto 14552.49 15540.00 $987.51 10/1/96 42 LucentTech 1999.88 2352.00 $352.12 8/24/95 130 KLA Instrm 5812.49 5638.75 -$173.74 8/12/96 130 AT&T 5145.11 4013.75 -$1131.36 8/13/96 250 3Com Corp. 11714.99 7156.25 -$4558.74 10/22/96 600 ATC Comm. 13761.50 2587.50-$11174.00 CASH $39092.98 TOTAL $125482.48