Fool Portfolio Report
Friday, June 27, 1997
Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA, (June 27, 1997) -- The Fool Portfolio is built upon guidelines explained in The Motley Fool Investment Guide, but those guidelines have been tweaked slightly over the past eighteen months.

The Foolish Tome (published in January of 1996) suggests a step-ladder approach to investing, beginning with the Vanguard S&P 500 index fund. The index fund is the best way to match the market's performance while safely avoiding the typical mutual fund that can't beat the S&P, and that also charges you fees. You could invest in only the S&P over your life-time and probably retire with homes on both coasts.

The next step "above" the S&P is the Foolish Four, our variation of Beating the Dow. The four stocks comprising the Foolish Four have returned 23% annually, on average, over the past quarter-century. The approach has doubled the S&P's return with minimal effort each year.

The next step involves adding small caps to your portfolio of Foolish Four stocks in order to pursue market-crushing returns in bright, young companies such as America Online and Iomega. This additional step is suited for investors with more time and the desire to study stocks.

Once a person is comfortable with small caps, he or she may wish to move onto shorting stocks, betting on "overvalued" stocks to fall, and making the portfolio more suited to weather market downturns. Shorting is usually a shorter-term approach, though many people have been known to be short certain stocks for years, and we see our Trump short as a longer-term short -- for us.

Our selling philosophy -- which has been reiterated to us at Fool HQ recently -- is to sell when something better is found to replace the stock being sold. Stocks outperform all else over the years, and we don't try to time the market, so we want our money in stocks as consistently as possible.

When partial positions in our two largest holdings were sold this spring, we thought we had new purchases lined up to replace them. It's taken more time than previously thought, though, and the cash has sat on the sidelines longer than we'd like. The philosophy of having something better to buy before selling has been reinforced.

Of course, you can't always have something to replace what you're selling. Sometimes -- with small caps especially -- a story or valuation may change quickly and you'll want to sell without having to first find something to replace the sale. But as a general rule, while being long-term investors and not knee-jerk traders, we aim to have something better to replace whatever we sell, and this will be the case as we move forward.

The Investment Guide then shares that initially about 30% of our portfolio is invested in the Foolish Four stocks, 60% in small cap and growth stocks, and 10% in shorts. We aim for a well-rounded portfolio, supported by solid Dow stocks paying healthy dividends, pushed ahead further by small cap and growth stocks, and holding a bit of a "hedge" on the market by shorting overvalued stocks.

Rather than changing any of the above guidelines, we've further stratified and classified some, and we're working to match the portfolio more closely to these guidelines.

Our initial portfolio allocation still stands as:

Small-cap, mid-cap: 60% (about) of the portfolio
Foolish Four: 30%
Shorts: 10%

But within the small-cap and mid-cap portion we have more detailed definitions of what we're looking for. One type of company we're always searching for we call Emerging World Beaters. These are brand name, industry leading companies that aren't only leading their industry, but are creating their industry. These stocks present tremendous opportunity for growth. The two currently in the Fool Port are America Online and Iomega. Both stocks were bought because we believed that the companies were emerging world beaters, and we still believe this.

To complete the 60% of the portfolio invested in small and mid-caps, we search for market-beating growth that doesn't need to come from an Emerging World Beater company. In a life-time you may only find a few true "world beating" stocks, while there are many great companies that are growing faster than the market. Within the portfolio, we call these small and mid-cap stocks simply "Growth."

In the growth section we currently hold KLA-Tencor, Innovex, 3Com, and ATC Communications. If we were to buy something like Intel we'd be looking for steady growth -- hopefully market-beating growth -- and that company would be placed in this category as well. Intel is a world-beater that is creating its industry, but it isn't "emerging" as America Online and Iomega were when the Fool purchased them. Intel has a $117 billion dollar market cap. Iomega and AOL had market caps of only a few hundred million dollars three years ago.

In the same vein, you can easily say that KLA-Tencor, 3Com, and Innovex all lead their industries. They do. But they're not brand name companies that are creating their industries -- even though they are creating leading technologies within their industries.

It should be apparent that Emerging World Beaters are difficult to find. We're always looking. But in the quest for growth there are dozens of market leading companies out there, small and mid-caps, and in our search for growth we of course want to buy market leaders. We feel that 3Com, KLA-Tencor, and Innovex fit the mold well and offer market-beating earnings growth. ATC Communications is working to lead its industry as well. Given time, perhaps it will. At least it has the ambition.

Looking at the current Fool Portfolio, we have:

Small and mid-caps: 49% of total portfolio
Consisting of:

1. Emerging World Beaters (AOL, IOM): 28%
2. Growth (COMS, KLAC, INVX, ATCT): 21%

Foolish Four: 30% of total portfolio

Shorts: 8% of total portfolio

Cash available is $29,000: 20%

(The numbers add to 107% due to the cash that our DJT short position brought into the portfolio, which we won't use to buy stock. Of the $40,000 cash in the portfolio, $29,000 is the true amount "belonging" to us for use.)

Glancing the current portfolio allocations, it's apparent that we're at least looking for two more small to mid-cap positions -- either Emerging World Beaters or growth companies that dominate their industries. We're also looking at shorts, because we would like to add one more. Our guidelines call for about 10% of the portfolio to be in shorts, but up to 15% isn't unrealistic.

Of course there are many ways in which to invest. The Boring Portfolio has a different strategy, and many people simply invest in the S&P and never think about stocks again. Many others invest strictly in the Foolish Four, or Dow Dividend approach.

While recognizing the variety of ways in which to invest, we're going to begin two new real-money portfolios in the Hall of Portfolios by the end of July -- before the summer evenings begin to shorten. The portfolio run by Tom Gardner will be a Cash King / MoneyHeavy portfolio.

The other portfolio will be run by Randy Befumo and myself, and will be a Direct Investment or DRIP portfolio. We'll show how to invest in leading companies directly, each month, without paying brokerage commissions. You'll be shown how to set up a DRIP account with as little as one hundred dollars, and then anyone can follow along with us from there. We'll begin slow (no stocks) and build up gradually. We plan to invest $100 per month after an initial $500 investment. Our Foolish DRIP portfolio has a twenty-five year goal.

Much more on these two portfolios soon!

The Week: The Fool Portfolio had a bummer of a week, down 4.45% while the S&P fell 1.27%. Our most volatile stocks -- America Online, Iomega, and 3Com -- all gave back a substantial amount of what they had gained during the past weeks.

These three stocks are ones that we're most comfortable owning, and for which we have the most hope, so we're not concerned about their typical volatility.

3COM (Nasdaq: COMS) announced earnings in line with expectations on Tuesday. IOMEGA (NYSE: IOM) announced a new OEM partner concerning its new Buz multimedia technology.

Next week we'll look at a slightly revised Foolish Eight checklist that we use for finding small cap growth stocks, and we'll plug the latest Fool purchase, INNOVEX (Nasdaq: INVX), into that checklist. I'm also waiting for a return phone call from ATC COMMUNICATIONS (Nasdaq: ATCT), which should take place next week.

The Foolish step-ladder approach to building a portfolio -- after getting your finances in order -- is outlined in the "Thirteen Steps to Investing Foolishly," in the Fool's School.

Fool on!

Fool Message Boards -- What are Fools saying?
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Daily Double -- How can you find the next double?
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Boring Portfolio -- Bore holding up in down market.
Fool Four -- 22% annually, historically.
Fribble -- A fun, quick story from readers.

Stock Change Bid ---------------- AOL -1 5/8 54.50 T - 5/16 35.81 ATCT --- 5.00 CHV -1 1/8 72.75 DJT + 1/4 10.38 GM + 7/16 55.81 INVX + 1/2 27.63 IOM - 9/16 19.75 KLAC -1 1/2 48.63 LU + 3/8 71.81 MMM --- 102.00 COMS -1 5/16 45.44
Day Month Year History FOOL -1.28% 2.61% 5.26% 180.92% S&P: +0.41% 4.60% 19.79% 93.56% NASDAQ: +0.12% 2.70% 11.40% 99.69% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 19.75 683.73% 8/5/94 355 AmOnline 7.27 54.50 649.66% 8/12/96 110 Minn M&M 65.68 102.00 55.31% 10/1/96 42 LucentTech 47.62 71.81 50.82% 8/11/95 125 Chevron 50.28 72.75 44.68% 8/24/95 130 KLA Tencor 44.71 48.63 8.75% 8/12/96 280 Gen'l Moto 51.97 55.81 7.39% 6/26/97 325 Innovex 27.71 27.63 -0.31% 8/13/96 250 3Com Corp. 46.86 45.44 -3.04% 8/12/96 130 AT&T 39.58 35.81 -9.51% 4/30/97 -1170 *Trump* 8.47 10.38 -22.51% 10/22/96 600 ATC Comm. 22.94 5.00 -78.20% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 19347.50 $16765.63 5/17/95 980 Iomega Cor 2594.53 19355.00 $16760.47 8/12/96 110 Minn M&M 7224.44 11220.00 $3995.56 8/11/95 125 Chevron 6285.61 9093.75 $2808.14 8/12/96 280 Gen'l Moto 14552.49 15627.50 $1075.01 10/1/96 42 LucentTech 1999.88 3016.13 $1016.25 8/24/95 130 KLA Tencor 5812.49 6321.25 $508.76 6/26/97 325 Innovex 9005.62 8978.13 -$27.50 8/13/96 250 3Com Corp. 11714.99 11359.38 -$355.62 8/12/96 130 AT&T 5145.11 4655.63 -$489.49 4/30/97 -1170*Trump* -9908.50 -12138.75 -$2230.25 10/22/96 600 ATC Comm. 13761.50 3000.00-$10761.50 CASH $40625.59 TOTAL $140461.09