Fool Portfolio Report
Friday, August 8, 1997
by Tom Gardner (TomGardner)
ALEXANDRIA, VA (Aug. 8, 1997) -- The Fool Portfolio beat the market today by closing down only 0.83%. Having a little cash off the table was a small comfort today. For the week, month and year, Foolishness is in the hunt for winning or placing in 1997, but trailing now. Here are the numbers:
Week Month Year S&P 500: -1.44% -2.18% 26.03% Nasdaq: 0.26% 0.30% 23.82% Fool: 2.57% 3.86% 20.02%
If The Fool doesn't squeak it out in 1997, it'll be further proof that we're fallible. Which is an odd thing to say. Of course we make mistakes. We make 'em all the time. We're a ragtag band of Fools here. Heck, we shorted Paychex. We went long ATC Communications. Do you remember those heady days in 1995 when we believed that Sonic Solutions might lead the digital revolution?
When we consider that none of those blunders was all that long ago, we and you should expect The Fool Portfolio to delight in its fair share of humble pie ahead. And yet -- get this -- The Fool Portfolio has still out-performed virtually every mutual fund on the planet since our launch in August, 1994.
In fact, mutual-fund performance stats are much more discouraging than that. Over 80% of U.S. managed funds have actually lost to the S&P 500 over the past three years. While I don't expect them to issue public apologies or to redistribute management fees to their shareholders, maybe it is time for mutual funds to stop pretending some thorough trouncing of their indexing brethren. 'Cause it hasn't happened.
Let's not be unfair, though. You can bet that brokerage firms pushing common stock on their clients also aren't faring well in their battle against the S&P 500. If you've been reading the Fool's My Dumbest Investment folder, you've suffered the almost endless flow of laments about poor investments in unknown companies and low-grade penny stocks pitched by full-service brokers. No matter who the broker, Fool, if they're selling you companies unfamiliar to you with stocks under $5 per share, think ghost in the house or ants in pants or engine on fire and. . . GET OUT!
(insert .wav file from the movie Poltergeist here)
Now certainly not all of our nation's investment firms are engaged in the cynical game of foisting bad stock inventory on their clients. But even then, a good many of them run operations so that their clients can't access a year-end performance statement that includes the deduction of all research and commission costs. When it comes to individual investors, the game on Wall Street is still three shells and a little red ball buried in the palm.
Given the lack of accounting, no Fool can fairly assume that big firms are out there thrashing the index fund for their small clients. Until Manhattan's money-houses rejigger compensation structures away from transaction-based rewards and over to performance-based rewards, we have to assume that en masse they're losing to the market. Losing to the market... while advertising during the PGA Championship that we ought not try this without their help.
(insert .wav file of Fool gagging into pocket handkerchief here)
Obviously, the opposite is true. You can study Starbucks, Gap, Wrigley, Hershey, Schwab and Tootsie Roll with the best of 'em, Fool. And in so doing, you can concentrate on your total returns rather than letting them manage your money for their total returns.
Naturally, you'll make some mistakes.
I'd like to briefly celebrate a mistake that The Fool Portfolio made a few years back that, numerically, was actually a huge winner for us. When we sold Ride Snowboard (now Ride Inc.) in November, 1995, we turned profits of $5,692.16, marking one-year returns of 112.62%. By all accounts back then, Ride was a smashing winner for us. A sugar dumpling.
After our sale at $21 1/8 per share, RIDE INC (Nasdaq: RIDE) then continued its rocket ride into the everlasting. This while, believe it or not, the business was plummeting. In January, 1996, the stock traded up to $35 per share. We made what The Street might call a "trading mistake." And, with Foolish aplomb, we taunted ourselves through the winter of 1995-1996 for having let 65% in additional profits fall through our fingers as the market bid Ride Inc. up to a $350 million valuation.
What a difference a little more context makes.
Two years later, Ride Inc. is struggling just to be a company. The stock is trading at $2 7/8; the company is capitalized only a bit higher than $30 million. New management has been shuttled in and, it hurts to say it even now, but the financial statements are a mess. Ride has less than $2 million in cash; they lost over $2 million in the recent quarter; and inventories and receivables are OOC (that's "out-of-control" in summer-camp talk).
And that last point is important. I want to make sure I haven't glossed it over. The company has too much of its own product (inventory) and has yet to collect enough of the sales from its distributors (receivables). Rising receivables are indications that Ride's distribution partners aren't about to pay up for delivered product until they can sell it. And sales are soft. Not good.
We made a mistake on Ride Snowboard -- not a "trading" mistake, an "investing" mistake. What were the problems? Though a consumer business, Ride was mostly a one-time-sale business. Who's going to buy five snowboards, or six? Further, though a consumer business, Ride had little chance of becoming a mass-market brand.
Those are qualitative reads, but the numbers supported them even when we held the stock. When inventories and receivables rise in excess of sales, investors should wake up at midnight, pace the kitchen floor, and worry that the company might be artificially inflating short-term sales and earnings by assuming a weaker position with distributors. And that's no way to live!
We've been talking a lot about current assets and current liabilities, and about the danger of rising receivables, over on the Cash-King folder on our web site (www.fool.com). If the principles aren't clear to you, you'll want to make yourself very familiar with them. Subscribers of Ye Olde Printed Foole in 1993 witnessed the problem with us firsthand in that barking-dog stock, Styles on Video. Yet even after(!) we found ourselves in a stock with a weakening balance sheet, we barely got out of Ride Inc. in time.
No, it wasn't a colossal mistake on our part, but it was a mistake. We escaped -- somewhat unknowingly -- by the skin of our teeth on Ride, even having doubled our money. Chalk up another lesson learned, add another round of thanks from us for the global network. The former MF Assets (Rich Marshall) had been focusing attention on just these same matters in our Reading Financial Statements folder years ago. Thanks, Rich, we finally learned. You saved us some serious bucks and put us in position to profit greatly going forward. Dinner is on us next time we're out on the coast!
Mistakes. We'll all make them. Wouldn't it be wild if the financial industry halted their marketing campaigns and retooled them toward the truth? In a world of open access to information and mass conversation, that strategy would work nicely. No?
Have a great weekend.
Tom Gardner, Fool
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Stock Change Bid ---------------- AOL -1 5/16 69.94 T + 3/16 40.44 ATCT - 3/32 5.03 CHV - 5/16 77.69 DJT + 1/4 10.00 GM -1 3/16 62.75 INVX - 3/8 34.50 IOM + 9/16 24.13 KLAC -3 62.13 LU -2 11/16 85.38 MMM -1 1/8 94.81 COMS + 1/16 55.63Day Month Year History FOOL -0.83% 3.86% 20.02% 220.33% S&P: -1.86% -2.18% 26.03% 103.65% NASDAQ: -1.58% 0.30% 23.82% 121.96% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 69.94 862.00% 5/17/95 980 Iomega Cor 2.52 24.13 857.34% 10/1/96 42 LucentTech 47.62 85.38 79.30% 8/11/95 125 Chevron 50.28 77.69 54.49% 8/12/96 110 Minn M&M 65.68 94.81 44.36% 8/24/95 130 KLA-Tencor 44.71 62.13 38.95% 6/26/97 325 Innovex 27.71 34.50 24.51% 8/12/96 280 Gen'l Moto 51.97 62.75 20.74% 8/13/96 250 3Com Corp. 46.86 55.63 18.70% 8/12/96 130 AT&T 39.58 40.44 2.17% 4/30/97 -1170 *Trump* 8.47 10.00 -18.08% 10/22/96 600 ATC Comm. 22.94 5.03 -78.06% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 24827.81 $22245.94 5/17/95 980 Iomega Cor 2594.53 23642.50 $21047.97 8/11/95 125 Chevron 6285.61 9710.94 $3425.33 8/12/96 110 Minn M&M 7224.44 10429.38 $3204.94 8/12/96 280 Gen'l Moto 14552.49 17570.00 $3017.51 8/24/95 130 KLA-Tencor 5812.49 8076.25 $2263.76 6/26/97 325 Innovex 9005.62 11212.50 $2206.88 8/13/96 250 3Com Corp. 11714.99 13906.25 $2191.26 10/1/96 42 LucentTech 1999.88 3585.75 $1585.87 8/12/96 130 AT&T 5145.11 5256.88 $111.77 4/30/97 -1170*Trump* -9908.50 -11700.00 -$1791.50 10/22/96 600 ATC Comm. 13761.50 3018.75-$10742.75 CASH $40625.59 TOTAL $160162.59