Fool Portfolio Report
Thursday, July 17, 1997
by Tom Gardner (TomG@Fool.com)
ALEXANDRIA, VA, (July 17, 1997) -- Hello Mom,
I'm dedicating this portfolio report to you, with the hope that you'll stumble upon the promotions flooding America Online and the World Wide Web tonight. I'm angling just for a telephone call, a letter, even an e-mail. It's been three weeks since I've heard from you, though my sources say you're still in regular contact with your daughter, your other son, your daughter-in-law, your grandchildren. In fact, everyone has talked to you in July, everyone but I. In the words of our Irish ancestry, "My own mum's left me."
Mom, are you out there? This report is for you; if you read it, drop me a line.
Fools, this evening I'm going back to the well with my bucket and a strand of hay in my mouth, returning to coverage of the cash-king and money-heavy approaches to investing. Dunderheaded approaches if ever there were. Stocks have been rising at a blistering pace. Wear a pair of new tennis shoes next time you play, and you'll get a big, soft, red blister on your heel in an hour; that's how fast stocks have been rising.
In 1995, the S&P 500 rose 34.11 percent. In 1996, stocks rose another 20.26 percent. Since January 1, U.S. equities are further up 25.77 percent. Damned impressive. That deserves a column:
Thru 7/17/97 +25.77%
Annual Growth Rate +31.50%
Yep, the stock market's risen at over 31.5 percent per year during the last thirty-one months. Given that stocks have climbed graphs at an annual rate of about 11 percent over the last century, these latest returns are beyond spectacular. They're farther out than nowhere. They're more chocolate than a kid could eat. They're champagne, strawberries and bicycle rides each night for a whole year. They're a long fly ball over the center-field fence with six runners on every base.
They can't continue.
If anyone casually tells you, a Fool, not to be worried about market levels over the next three years, dismiss them with all the haughtiness of a queen. It is good to be worried up here, just as it's right and contrary to love the market after a down year. To immerse yourself in it after two consecutive down years. To get down on a knee before it after three (that is, if you're obsessed with money!).
Opposite to the past few years, stocks may well be headed for a protracted decline into the next millenium. The S&P 500 might not reach the 1,000-mark until 2002. If that were to happen, investors would win little more than 1 percent annual growth. And chances are that wouldn't play out in a orderly and slow prance upward for 5 1/2 years. When growth dries up, the market will run flat for a few years, no doubt, and bound down uncontrollably on certain days, as well as gradually shrink from one quarter to the next. As it goes, it'll reduce what seemed like my money -- all my money -- into 20 percent less capital, or 30 percent. Or 40 percent. All in stock certificates.
For Coca-Cola investors in 1972, the decline reduced their holdings by 67 percent. The Coca-Cola Company endured a decline from $148 1/2 per share to $53 per share in just two years. So the investor with $100,000 in KO stock in 1972 had less than $35,000 there within twenty-four months. As the media ran a slew of stories mocking the buy-and-hold investment strategy, untried investors bailed. And those declining numbers, those experiences turned margined investors into mendicants, made T-bill buyers out of stock-market aficionados -- made a lot of people very unhappy about life.
In 1974, some people swore off common stock for good. Forever. And never returned. A lot of Americans popularized the idea that equity ownership was nothing more than petty gambling. Hey, for many people, that's just what it had been. They were rolling dice on the stock market, treating businesses like a giant money machine. When the bottom fell out, they hadn't been told that, though volatile, stocks had doled out 11 percent growth annually over the past five decades. Not true for gambling casinos which were taking (and still are) 5-10 percent away from their players per bet. The dismal performance of stocks in the 1972-1974 bear market is mirrored in Las Vegas, on average, every five bets.
What happened is that U.S. investors were putting money into stocks like bettors, hoping for near immediate profits, a babe (male or female) on both arms, free drinks at the bar, and a spitting pool in their hotel room. Right now. Today. They bet on stocks; they did not invest in businesses. They traded paper rather than buying into people. And they got smushed. Given its broad definition, the stock market will always roll over bettors. It will always reward less those who bet on what they don't know than those who invest for years (or forever) in what they do.
The same thing is going to happen someday -- maybe soon, maybe ten years from today. Of course, we don't presume to know when the next declining period will come. But we do presume to know that it will come at some point -- quite probably when folks least expect it. And is it unreasonable to believe that today's bettors, buying stocks on margin and banking on winnings between now and this Christmas or next, these folks may very well be buying t-bills exclusively through the first half of the next millenium. Ruined. Bewildered.
Gosh, Mom, I'm sorry to sound so down this evening, but the truth is -- as far as moola is concerned -- U.S. investors are nearly walking on air. And the should be... The Fool, though ever cautious, is whistling evening tunes and pretending we know how to dance jigs. And Fools should be. The market has risen as great companies have borne down on the management of their capital as never before. And private investors are gaining ground -- the financial industry is being forced to serve the people.
Just as we suggested three years ago, the great majority of managed mutual funds are losing to the market; the index fund is plowing ahead without great expense; the Foolish Four, though being soundly thumped this year, has squished the market like a horsefly since August, 1994; The Fool Portfolio has outperformed the S&P 500 by 100 percentage points; great businesses are thriving, poor businesses are nearly not surviving -- and the students of both have made good money.
Away from the numbers, we're almost not hearing anything about technical analysis anymore, or market timing, or active trading. And basic business-value investing is showing up in schools, investment clubs, magazines, and newspapers. There's a lot of reason to be glad. Even though Money Magazine is going to run an August cover entitled "SELL STOCKS NOW", they'll look silly since it was designed more than six weeks ago. Generally people are cottoning to the idea that they ought direct a portion of their savings into common stock and make investing a lifelong endeavor.
One approach to investing that has gathered momentum of late is the idea of investing in extraordinarily-profitable growth businesses running what could be construed as monopolies. As America stages itself for competition around the world, it would appear that the Justice Department is largely laying off fears of monopolism among the nation's multi-national juggernauts.
The justices shot down the Office Depot-Staples merger, but they have left Microsoft, General Electric, Intel, Boeing, Lockheed, and Raytheon alone because their growth is so substantially international. They are taking American enterprise to the globe, not bearing down on U.S. consumers. These companies are, essentially, global small-caps not somewhat-intimidating, domestic large-caps.
Investing in them is gaining in popularity.
This is evident in the performance of The Cash-King Portfolio and The Money-Heavy Portfolio, respectively launched in July, 1995 and June, 1997. Swollen with high-margin, debt-free, multi-national consumer businesses like Gillette, Dell Computer, Coca-Cola, Oxford Health, The Gap, and Microsoft, the two portfolios have obliterated the market -- bursting forward over and again with all the force and speed of Michael Johnson in his golden shoes.
Since launch 7/1/95 Cash King + 200.7% S&P 500 + 64.7% Since launch 6/13/97 Money Heavy + 16.0% S&P 500 + 10.3%
The point of restating the principles and reintroducing the performance numbers of these portfolios isn't to stick our chests out, strut like geese, flaunt our wares, and talk a lot of trash about Wall Street -- though, heck, each of those do have their proper time and place. The purpose is to remind investors that buying monopoly growth in the consumer space and sticking with it for many years has proven and should continue to prove a magnificently-effective, research-light, gleeful way to outperform the average returns of common stock.
I think the chances are that the Justice Department won't interrupt the progress of our multi-national consumer businesses anytime soon -- particulalry those whose technology turns over products immediately, resulting in consistently the best price for the best stuff out there. Lawyer for lawyer, I'd put my money on our global technology corporations (and their consumers) over the trust busters. Conversely, the businesses that are domestic and relatively unchanging are very different from Microsoft.
So, what sort of stocks are in Cash-King and Money-Heavy? (Read more below)
The Cash-King PortfolioPurchase Present Total Company 7/1/95 7/17/97 Gain Dell Computer $16.06 $150.50 +837% Microsoft $47.81 $149.25 +212% Sun Microsystems $12.69 $45.75 +261% Intel $34.13 $88.00 +158% Cisco Systems $27.63 $78.75 +185% America Online $26.56 $68.00 +156% Gap $17.38 $39.88 +129% Hewlett Packard $39.94 $66.25 +66% Texas Instruments $70.94 $115.25 +62% Silicon Graphics $43.25 $17.75 -59% TOTAL n/a n/a +200.7% S&P 500 556 931 +67.4%
The Money-Heavy PortfolioPurchase Present Total Company 5/29/97 6/13/97 Gain Microsoft $125 7/8 $149 1/4 18.6% Coca-Cola $67 1/2 $69 1/4 2.6% Gillette $87 3/4 $100 3/8 14.4% Intel $81 7/8 $88 7.5% Oxford Health $65 1/8 $86 5/8 33.0% Dell Computer $110 3/8 $150 1/2 36.4% Gap $34 1/4 $39 7/8 16.4% Cisco Systems $66 3/4 $78 3/4 18.0% Johnson & Johnson $58 7/8 $62 1/4 5.7% Pioneer Hi-Bred $69 5/8 $75 7.7% TOTAL n/a n/a +16.0% S&P 500 844 931 +10.3%
A few questions beg for answers, and I hope you'll click through to our Cash-King Investing message folders as we search for them:
What other companies are cash-kings? Why aren't greats like Pfizer and Oracle included here (uhh, they should have been)? Is The Motley Fool dedicated to stock hype and penny huckstering? Is Warren Buffett's rate of return duplicatable by average investors? Should business-school students be required to read Philip Fisher's book "Common Stocks and Uncommon Profits" while also being directed to flip off the television set whenever Jimmy Rogers pokes out and recommends shorting Intel and Coca-Cola? When will Fool TV launch? Is Microsoft dramatically over- or undervalued (or neither)? And should The Money-Heavy Portoflio name be discarded for something better (even though Money Heavy does sound like an attractive villain in a Bond film)? Will The Fonz ever confess publicly that he's a Fool!? Does Wink Martindale invest in stocks? Are the cash-king investors on the Web board right that limit orders are a waste of time? Is there a non-Select Fidelity fund that has beaten the market over the past five years?
Drop by the folders, register to be a Fool there, pay not a dollar to do so, hopefully make investing one of your life's works, and smile whenever Elaine says to sell all your stocks three months before preaching that we're in the middle of a roaring bull market.
See you in the folders -- drop me a note, Mom.
Tom Gardner, Fool
Fool Message Boards -- What are Fools saying?
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Daily Double -- Hot to trot? Or set to stumble?
Daily Trouble -- Value in this butchered stock?
Fribble -- A fun, quick story from readers.
Stock Change Bid ---------------- AOL -1 7/8 67.75 T -1 5/16 35.00 ATCT - 3/8 4.19 CHV - 3/16 77.38 DJT + 3/16 11.31 GM +1 55.38 INVX -2 3/8 33.13 IOM -1 3/8 22.00 KLAC -2 7/16 57.00 LU -2 5/16 86.19 MMM -2 3/16 99.81 COMS -2 3/4 55.56Day Month Year History FOOL -2.87% 7.94% 13.84% 203.81% S&P: -0.53% 5.25% 25.77% 103.23% NASDAQ: -0.75% 8.79% 21.52% 117.84% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 67.75 831.91% 5/17/95 980 Iomega Cor 2.52 22.00 773.02% 10/1/96 42 LucentTech 47.62 86.19 81.00% 8/11/95 125 Chevron 50.28 77.38 53.87% 8/12/96 110 Minn M&M 65.68 99.81 51.98% 8/24/95 130 KLA-Tencor 44.71 57.00 27.48% 6/26/97 325 Innovex 27.71 33.13 19.54% 8/13/96 250 3Com Corp. 46.86 55.56 18.57% 8/12/96 280 Gen'l Moto 51.97 55.38 6.55% 8/12/96 130 AT&T 39.58 35.00 -11.57% 4/30/97 -1170 *Trump* 8.47 11.31 -33.58% 10/22/96 600 ATC Comm. 22.94 4.19 -81.74% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 24051.25 $21469.38 5/17/95 980 Iomega Cor 2594.53 21560.00 $18965.47 8/12/96 110 Minn M&M 7224.44 10979.38 $3754.94 8/11/95 125 Chevron 6285.61 9671.88 $3386.27 8/13/96 250 3Com Corp. 11714.99 13890.63 $2175.64 6/26/97 325 Innovex 9005.62 10765.63 $1760.01 10/1/96 42 LucentTech 1999.88 3619.88 $1620.00 8/24/95 130 KLA-Tencor 5812.49 7410.00 $1597.51 8/12/96 280 Gen'l Moto 14552.49 15505.00 $952.51 8/12/96 130 AT&T 5145.11 4550.00 -$595.11 4/30/97 -1170*Trump* -9908.50 -13235.63 -$3327.13 10/22/96 600 ATC Comm. 13761.50 2512.50-$11249.00 CASH $40625.59 TOTAL $151906.09