Fool Portfolio Report
Friday, April 25, 1997
by Jeff Fischer (Jefff@fool.com)
ALEXANDRIA, VA., (April 25, 1997) -- The Fool Portfolio recap was near finished this afternoon, but as I went to save it the computer crashed. I had saved some of it earlier, but I lost too much text to reconstruct it tonight.
I had my monitor hoisted atop my shoulder, ready to heave it out the fourth story window, when Tom Gardner approached.
"What's up?" he asked.
I lowered the monitor and put it back on my desk, smiling
Tom had the idea of the recap being an interview of each other online, the topic being the Fool Port stocks. But we didn't have enough time, and besides, TMF Parlay and TMF Edible did something like that on Wednesday. Staring at a deadline 50 minutes away, while being (somewhat) good-humoredly disgruntled at losing the work -- but slow to conceive new ideas -- Tom had another suggestion: answer questions that are commonly asked of us regarding the Fool Portfolio.
Excellent idea. We'll do that, and next Friday I'll tackle the topic that I was originally going to present tonight. I refuse to be defeated by an Intel chip --- or whatever caused the computer to crash (I think it was AOL).
Tom sent me a few of the recently asked questions regarding the Fool Portfolio, and we'll tackle them in two seconds.
First, for the week the Fool Port was given a monkey-wrench beating. The portfolio fell 3.71% on weakness in Iomega and America Online, as well as AT&T and 3Com. 3Com fell on further price cuts from Intel, which the networker quickly matched. AT&T fell on reporting earnings below the number accomplished last year, though revenue rose slightly to above $13 billion. I think everyone knows the AT&T story. If not, email me. The company was split-up in 1984 and has been struggling off and on ever since. America Online and Iomega fell with tech stocks, as Nasdaq fell 1.09% this week while the S&P shed only 0.13%.
Short-term blahs in the market are natural. Some of them last several years. For the year, Nasdaq is down 6.33% and the S&P is up 3.33%. Let's tackle some questions!
1. What elements of market timing DO exist in your investment approach?
Timing is an element in every investment, in that you run valuations on stocks and based on the valuation given at any time, you decide whether it appears attractive to you as a buy or a sell. But arguably business analysis is much more important than pricing analysis. If you're investing for the next twenty years, it's more important that you invest your money with a brilliant management and successful business model rather than invest in a small company whose stock price may look attractive, while the company faces a questionable future.
I really believe buying great management and great business models should be the first goal of long-term investors. The stocks of world-leading companies rarely fluctuate more than 30% per year, in an average market year (not the last two years); so if you're investing for the next 20 years, that fluctuation, though substantial near-term, means very little in the long-term. Trying to time an investment in a world-leading company is often a waste of energy and an unsuccessful venture. If you truly believe a stock is overvalued, though, of course don't buy it. But that's your call. I believe that buying great investments on a regular basis will reward patient investors very well over the next two decades, regardless of whether they're always buying at new highs.
In the Fool portfolio, market timing doesn't exist, though individual stock timing does, of course -- through stock valuations. The Gap was sold when it was thought to have reached a fair value. The stock has gone down since. In the same vein, 3Com was bought. On the current information available, that stock appeared undervalued. It gained about 80% for the Fool Portfolio in short order, but then the outlook changed and the stock tumbled. That's part of investing. Importantly, the business beneath the stock is well-managed, dynamic, and promising. Owning the second-leading networker in the world is not something to regret over the long-term.
2. If ATC Communications is trivial to the overall portfolio, why not invest the remains in something you believe in? $2600 compounded at 13% annually is worth $1.2 million in fifty years.
It's easy to say in retrospect that ATC Communications should have been sold when it failed to meet one of reasons that it had been bought: namely, estimate-beating earnings. That was a key reason behind the purchase and when it was missed in October, this point was reconsidered. The reconsideration touched the subject of management changes, and industry changes, which were said by ATCT to account for the weak quarter. Instead of jumping out of the stock, the information presented itself as if it was a near-term change, while the business growth was still very promising going forward. The industry growth still is promising going forward, but will that come to fruition? More importantly for the Fool Port, will it help ATCT?
The company announces earnings next week and $0.07 is expected. The stock made new lows this week, below $4. It has become the single worst investment the Fool Portfolio has ever had. There is no way to sugar-coat that, and there's no reason to. The Fool Portfolio is the only portfolio in the world that we know of that is run in public view, with all trades made after they are announced, commissions included in returns, and performance posted daily against the S&P and Nasdaq. The only other real-money portfolio doing this is the Boring Portfolio. It's extremely easy to criticize a portfolio run in full public view. But you don't need to criticize us by yourself, because we criticize ourselves at some point each week.
Learning is not a process without mistakes.
We haven't sold ATCT yet because at the few points of contention on that issue it appeared too cheap to sell. We'll see what earnings does for the stock. Now, at $3 13/16 bid, the stock is at about 12 times trailing and 8 times next year's estimates. That estimate is a big question mark, though.
Again, we're not aiming to be perfect. But we do need to address the mistakes as they come and learn from them. Buying this stock when we did was obviously a mistake, for reasons written of several times. We'll see what happens from here. As much as it was overvalued before, it currently appears to be going the other way, now. Luckily we're well diversified, from ATCT with it's measly $72 million market cap, to mid-caps like 3Com at a $4 billion market cap, to multi-billion dollar giants like GM.
A final point, on the topic of the Fool's different investments: Buying and selling stocks is a dynamic process in that each decision is based on different and never repeated circumstances -- and on more than just a checklist of topics. Hence, contradictions often seem abundant when you look at the investments of even a single person.
3. Should a believer in your teachings buy all of your portfolio stocks here? And why don't you own any of the companies like Coke, Microsoft, Intel and General Electric, which you have told us repeatedly that you love?
A believer in the Fool's message would do exactly the opposite: they would buy their own stocks, based on their own research. This portfolio serves for ideas, and for lessons, and we're going to focus on the lessons more, while focusing even further on long-term thought.
On that topic, with regards to the second part of this question: on the Fool we're going to focus even more so on the big picture, on life-tested investment strategies, on investing in strong management, winning business models, cash-heavy leaders with sustainable revenue growth. Investing in well-run, leading businesses that are growing with the world, as the world grows, makes a lot of sense. We didn't raise money to sit in cash. There are tremendous companies in which to invest, and we want to work the portfolio, in part, in that direction even much more so. We already feel that 3Com, America Online, and Iomega are strong leaders in their respective industries.
Don't expect this portfolio to remain static. Sonic Solutions was bought more than two years ago but it certainly wouldn't be bought today. ATCT was bought six months ago. I doubt we will make that same sort of mistake again. Investing is as much a process of learning as painting is, or musical talent; some learn much more quickly than others, and some never learn. I think the Fool is very much off to an excellent start, and is being built upon a very solid foundation.
The Fool is beating the averages by 122% since August of 1994, even with some disastrous mistakes along the way. The Fool is going to continue to learn as time goes on. Not to do so, and not to change with the lessons, would be a mistake.
Improvement is a continuous process and we're looking forward to doing it, lock-step, day-by-day, year-by-year. Foolishly. Openly -- being accountable through-out the process. Admitting mistakes. We're striving toward the best investment approaches that can be developed over the long-term. And, again, doing it Foolishly.
Have a Foolish weekend!
P.S. Donald wasn't shorted... yet.
Stock Change Bid -------------------- AOL --- 42.75 T + 3/8 31.25 ATCT - 1/2 3.81 CHV - 1/2 65.75 GM - 5/8 54.88 IOM -1 1/8 15.38 KLAC -2 41.38 LU - 5/8 55.38 MMM - 3/4 85.38 COMS -1 7/8 26.75Day Month Year History FOOL -1.94% -0.63% -7.78% 146.11% S&P: -0.75% 1.09% 3.33% 66.97% NASDAQ: -1.53% -1.02% -6.33% 67.91% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 15.38 510.12% 8/5/94 355 AmOnline 7.27 42.75 488.03% 8/11/95 125 Chevron 50.28 65.75 30.76% 8/12/96 110 Minn M&M 65.68 85.38 29.99% 10/1/96 42 LucentTech 47.62 55.38 16.29% 8/12/96 280 Gen'l Moto 51.97 54.88 5.58% 8/24/95 130 KLA Instrm 44.71 41.38 -7.46% 8/12/96 130 AT&T 39.58 31.25 -21.04% 8/13/96 250 3Com Corp. 46.86 26.75 -42.92% 10/22/96 600 ATC Comm. 22.94 3.81 -83.38% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 15176.25 $12594.38 5/17/95 980 Iomega Cor 2594.53 15067.50 $12472.97 8/12/96 110 Minn M&M 7224.44 9391.25 $2166.81 8/11/95 125 Chevron 6285.61 8218.75 $1933.14 8/12/96 280 Gen'l Moto 14552.49 15365.00 $812.51 10/1/96 42 LucentTech 1999.88 2325.75 $325.87 8/24/95 130 KLA Instrm 5812.49 5378.75 -$433.74 8/12/96 130 AT&T 5145.11 4062.50 -$1082.61 8/13/96 250 3Com Corp. 11714.99 6687.50 -$5027.49 10/22/96 600 ATC Comm. 13761.50 2287.50-$11474.00 CASH $39092.98 TOTAL $123053.73