Fool Portfolio Report
Tuesday, July 22, 1997
by Jeff Fischer (TMFJeff@aol.com)
ALEXANDRIA, VA, (July 22, 1997) -- The market was back to its old tricks today, and in a big way. The indices hit the springboard hard, and catapulted into the sky. The S&P soared 2.3%, Nasdaq 1.8%, and the Dow gained 1.9%, or 154 points, to 8061.
La Fool? She gained a healthy 2.06%. Only Iomega worked to keep the portfolio from surpassing the S&P. Otherwise, it was a picture-perfect day for the Port, with every stock rising and the short falling -- even in this heady market.
Fool Andy Cross (TMF Opie) shared that he headed into a Motley Fool chat room today and somebody asked, "Did that green guy say anything yet?"
"That green guy" is Alan Greenspan, and essentially he said today that if inflation did rear its ugly head, the Fed would be ready to chop it off -- "That's all. Thank you, good night."
...Suddenly people wanted to buy what other people didn't want to sell, so stock prices rose.
This column is about managing a portfolio of stocks, so what does today's news have to do with portfolio management? Arguably little. Perhaps one lesson we can consider today is selling -- and why.
The market has been rising for seven years, but not without set-backs such as last summer and this spring, and the entire year of 1994. While looking through archives, though, I found several articles from 1995 predicting that the market was ready to fall -- and fall hard. One article wrote of two new mutual funds designed to profit from the fall of the S&P. One fund was buying options betting on the S&P to fall and also shorting stocks -- an aggressive "bear market fund." You needed $10,000 to invest in the fund, and pity you if you did. Even in May of 1995 the fund was down 11.7% while the S&P was up 16%. Ouch.
That's an "ouch" two years ago.
Other articles from 1995 spoke of mutual funds unloading stocks, getting defensive, and stating that, "looking at the past behavior of the market, this bull run is likely coming to an end." Certainly the people making these statements have had a change of opinion. But having to change your opinion about the overall market makes you Wise. Fools don't sway in their belief about the long-term outlook for stocks, and so invest accordingly. But Fools aren't ignorant. The possibility of negative years isn't just a possibility -- it's a reality. It's going to happen. The way so many people obsess over it, though, you begin to wonder what golden rainbow they're chasing after anyway.
What advantages do you gain by removing all your money from stocks now, and slapping it into a 5.75% CD? When do you invest in stocks again? And what risks do you face while not being invested?
People seem to forget that even while stock markets get killed, many stocks still do quite well. Of course a majority of mutual funds get killed with the market, but individuals invested in the right stocks have an advantage in that, for one, they should only own the best stocks. They don't have $6 billion to spread around. And while individuals are far from invulnerable, they should know their handful of stocks very well and be able to hold them comfortably through whatever turns the market throws at them.
Since 1950 the average bear market has lasted eight months and lowered the stock market by 28%. Last summer we saw the Nasdaq fall nearly 20% and the S&P 10%. This spring we saw the same thing. These were far from eight month bear markets, of course, but were substantial "corrections." If you were patient, the rebounds came along and justified your diligence, as can happen following bear markets, too.
Over the years of 1973 and 1974 -- the largest bear market of the century, following the Great Depression -- stocks fell 45%. But from 1974 to 1976 the market moved to correct its over-reaction, and climbed 63%. The Dow struggled for the rest of the decade, then, but the Nasdaq Composite rose every year from 1975 to 1980. In fact, from 1975 to the end of 1980, the Nasdaq rose 238%, while the Dow rose 56%.
If a person had invested in a diversified portfolio -- but not OVER diversified -- owning world-leading and up-and-coming companies, they probably survived the 1970s (disco dancing aside) quite well. And if they were invested for the next few decades, their patience in the 1970s of course paid off again in the following decades -- through the pop age of the '80s and the grunge rock years of the '90s.
Meanwhile, the bear market of 1973 and 1974 didn't dismantle the Foolish Four stocks, either. The Fool Four rose more than 34% over the two year period, and then in 1975 and 1976 the Foolish Four rose 82% and 53%. Following those great years, the Fool Four remained just slightly positive each of the next three years, until 1980, when it burst forward 46%. If the Fool Portfolio was around back then, hopefully its Nasdaq stocks would have kept it moving from 1977 to 1980, and seeing how well the Nasdaq did from 1975 to 1980, that may have been the case.
Of course history means little more than does an old photo of yourself. You're familiar with it and thus comfortable with it, and so you reference it in order to succor any doubts that you may have about the future. But meanwhile, an old photo begins to represent less of who you are than does the current reflection in the mirror. Meaning, in an odd way, that the market is always new.
The Fool policy is to sell a stock when there are other options (in stocks!) that are more attractive than the stocks currently held. Period. The Fool has decades over which to be invested, and believes that you shouldn't be invested unless you have at least five years, if not ten. And while the bear markets of the past have been difficult, the largest lesson that they've taught is to hold on -- and keep holding on. And even buy more of the best stocks, if you can.
Counter to that, a recent survey of 310 mutual fund invstors conducted by Smith Barney found that 40 percent would "sell everything," or "sell something," if the stock market declined 15 percent over a short period of time.
So, they may have sold some in March and April.
Finally, while stocks have returned nearly 11 percent per year over the past seventy years, virtually all the stock market's returns since 1926 came from only 7 percent of its months. If an investor missed those months, he or she would have earned essentially zero returns. And many of the best months take place soon after the worst market periods -- when investors and market timers are least likely to buy back into stocks.
A long-term buy-and-hold perspective is necessary to being a Foolish investor.
That said, CHEVRON (NSYE: CHV) and 3M (NYSE: MMM) announce earnings tomorrow. Let's hope that the companies blow estimates out of the water so that the stocks pop a few points and we can flip out of them in August at the highs, as we make our annual Foolish Four switch!
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Stock Change Bid ---------------- AOL + 15/16 66.19 T +1 1/2 35.88 ATCT + 1/4 4.25 CHV +2 3/4 77.63 DJT - 1/4 10.31 GM +1 3/4 57.75 INVX +1 1/2 33.25 IOM - 5/16 23.19 KLAC +3 5/16 57.94 LU +1 82.88 MMM +1 3/4 100.31 COMS +1 7/8 56.38Day Month Year History FOOL +2.06% 10.01% 16.02% 209.63% S&P: +2.30% 5.52% 26.09% 103.75% NASDAQ: +1.75% 8.45% 21.13% 117.15% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 23.19 820.14% 8/5/94 355 AmOnline 7.27 66.19 810.42% 10/1/96 42 LucentTech 47.62 82.88 74.05% 8/11/95 125 Chevron 50.28 77.63 54.37% 8/12/96 110 Minn M&M 65.68 100.31 52.74% 8/24/95 130 KLA-Tencor 44.71 57.94 29.58% 8/13/96 250 3Com Corp. 46.86 56.38 20.31% 6/26/97 325 Innovex 27.71 33.25 19.99% 8/12/96 280 Gen'l Moto 51.97 57.75 11.12% 8/12/96 130 AT&T 39.58 35.88 -9.36% 4/30/97 -1170 *Trump* 8.47 10.31 -21.77% 10/22/96 600 ATC Comm. 22.94 4.25 -81.47% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 23496.56 $20914.69 5/17/95 980 Iomega Cor 2594.53 22723.75 $20129.22 8/12/96 110 Minn M&M 7224.44 11034.38 $3809.94 8/11/95 125 Chevron 6285.61 9703.13 $3417.52 8/13/96 250 3Com Corp. 11714.99 14093.75 $2378.76 6/26/97 325 Innovex 9005.62 10806.25 $1800.63 8/24/95 130 KLA-Tencor 5812.49 7531.88 $1719.39 8/12/96 280 Gen'l Moto 14552.49 16170.00 $1617.51 10/1/96 42 LucentTech 1999.88 3480.75 $1480.87 8/12/96 130 AT&T 5145.11 4663.75 -$481.36 4/30/97 -1170*Trump* -9908.50 -12065.63 -$2157.13 10/22/96 600 ATC Comm. 13761.50 2550.00-$11211.50 CASH $40625.59 TOTAL $154814.15