Fool Portfolio Report
Thursday, January 2, 1997
by Tom Gardner (TomGardner)

ALEXANDRIA, VA., January 2, 1997 -- It seems appropriate to kick off 1997 with a little Woody Allen:

"90% of life is just showing up."

I see no reason to expect the percentages to change much in the year ahead. I also see no reason not to apply this basic life principle to the world of finance.

Mediocre money management houses will, no doubt, continue to present themselves as Sovereign Kings this year, with their concern for the greater good exhibited most gloriously in non-numerical, full-color advertisements during televised events. Great money managers, of course, will continue to run contrary by preaching that 90% of investing is just showing up and being common sensical.

I believe Charlie Munger opined that a class designed to spell out Warren Buffett's entire investment approach to novice and veteran investors, would take Mr. Buffett no more than two weeks to teach. Do you think the investment firms in Manhattan would be tickled to see Mr. Munger on Good Morning, America?

How about. . . every day this year?!

Keeping our fingers crossed for the impossible, knowing it won't happen, let's plunge into a short review of today's portfolio performance. Market activity would appear to further support Woody Allen's theory of just showing up. The Beating the Dow unit trusts punched-in throughout the day, driving up the highest-yielding issues on the index. We've written about this each year here in Fooldom, and while we're overwhelmed with self-satisfaction once again, let's be real -- it didn't take much insight.

What came of the Unit-Trust Boost this year?

AT&T: + 3/8 Chevron: + 3/4 General Motors: + $2 3/4 3M Corporation: + $3 1/8

The Foolish-Four group rose 1.61% whilst the S&P 500 fell 0.50%. A short-term aberration of no significance to enduring business values -- but still, kinda funny. Unit-trust managers, goodbye for 1997. Enjoy your time in Tahiti. Your models are in place!

90% of investing is just showing up.

Now it doesn't hurt to engage the ongoing complexities of the stock market and, more specifically, of the Dow Approach. Unfortunately, Foolishness hath not infiltrated the ranks so most people still consider finance unpardonably boring and indecipherable.

It is time now, though, in 1997 that we all teach everyone in America that stocks have risen at a rate of 11% per year over the 20th century. Not every year, but there's the average. Knowing that, we don't think you should pay any fees for market underperformance in the money that you have to invest over any period of time greater than three years. I suggest that you, friends, and family members write or call any of your mutual funds that have underperformed the market over the past three years. Request that your fee payments be returned. And demand that henceforth the fund charge nothing higher than a 0.10% expense ratio during years that they lose to the market.

Does that sound unreasonable?

What seems radical in fact makes perfect sense to anyone who survived third grade. With Vanguard's S&P Index Fund garnering a mere 0.20% in expenses for shadowing the market... why should other funds be paid considerably more for offering considerably less? Their pay should be linked to their performance.

It's a simple principle applied by thousands of companies of all shapes and sizes outside of the financial industry. Let's move the theory back onto Wall Street. Financial institutions regularly pressure the businesses that they invest in. "Do better or expect less." Is it not time for the clients of these financial institutions to apply the same logic, to ask for the same price-to-performance assumptions from The Firm? Shouldn't we expect that if they know enough about business to invest in and advise others, they apply the same theorems to their own operations?

This isn't a radical proposition. It isn't an original one, either. We here at Fool HQ think ourselves no more radical and no less duncical than the next Fool on the block. We think ourselves no less mathematically-challenged than the average citizen, with no greater insights than your standard curmudgeon, living on a pond in the woods, thinking. The answer to the succeeding question seems as clear to us as it would to a child:

Should mutual funds and brokerage firms that underperform the market over three-year periods be paid more or less than the index fund?

90% of private investing is just showing up by investing in the S&P 500 Index Fund, saving money, plowing it back into the market, and allowing the stock market to grow the growing base of your savings at a long-term rate of 11% per year.

But a Fool can do better.

It isn't so great an imaginative leap to posit that everyone in America can understand and employ The Foolish Four approach to high-yielding Dow stocks. I will endeavor here briefly to outline some of its logical underpinnings and to review the performance numbers -- in hopes of defending the notion that all of America can grasp it, would benefit greatly from it, and consequently that The Foolish-Four Approach fits neatly into Mr. Allen's theorem: 90% of life is just showing up.

The Foolish Four approach holds the following:

a. that very large companies whose stocks are out of favor are far more likely to bounce back than small companies whose stocks are out of favor;

b. that high dividend yields attract income investors;

c. that it is not unreasonable to believe that the popularity of this approach will only enhance the performance of the model, as it'll only give these companies greater access to capital (Soros, I think, would agree);

d. During the 1973-1974 bear market, with stocks down 30%, the Foolish Four rose 40%;

Nothing terribly complex there. Let's look at the numbers once more:

Fool-Four S&P 500 5-yr returns: 15,005% 1928% 5-yr returns: 328% 141% 1-yr returns: 30% 20%

Those are pretty convincing returns. True, in 1996, you wouldn't have garnered The Fool Portfolio's 43% rate of growth, but you also wouldn't have endured the huge rise in spring, the huge decline in summer, and the healthy autumn recovery that this portfolio endured. Your Dow stocks would simply have grooved ahead, more like a snowplow than a sports car on ice.

For your edification, a thorough look at the Fool-4 Approach, at all of the Dow numbers, along with a daily report on the group is available in our Fool's School area, one click away: The Dow Area -- 1/02/97: And They're Off!

To close the first report of the New Year, let's review some 25-year performance numbers for various "investment" vehicles:

  1. State Lottery: - 50% per play
  2. Casino Games: - 5% per play
  3. High-fee brokerage firm: < + 7% per year
  4. High-fee mutual fund: < + 9% per year
  5. S&P Index Fund: +10.5% per year
  6. Dow 30 w/dividends: + 13.0% per year
  7. The Foolish Four: + 23.0% per year

Now let's look at the 25-year effects of each on a portfolio of $30,000 -- all figures are pre-tax:

$30,000 in 25 years State Lottery: $0 Casino Games: $8322 Avg. brokerage firm: $162,823 Avg. mutual fund: $258,692 S&P Index Fund: $364,064 The Foolish Four: $5,305,778

These numbers occasion the final parting questions as we head into 1997:

1. Should politicians that support state lottery systems be allowed to walk around without handcuffs?

2. Is it ironic that while casino advertising is regulated, LottoBucks can promote itself at every corner market?

3. Would it have been a good idea to pay mutual funds handsome fees in order that they might earn you $100,000 less than the S&P 500 over a 25-year period?

4. Is it unreasonable to close your eyes and see $5.2 million every time a professional money manager scoffs at your daring to manage your own money?

5. Which should our nation hope for in 1997 -- more marketing dollars spent on the lottery or on The Foolish Four?

6. Do we think the Communications Revolution is hurting or helping people in America?

7. Do we think that, at the end of this year, the LA Times and the Chicago Tribune -- which have written aggressively in favor of the Digital World -- will be held in higher or lower regard than Dow Jones and The New York Times -- which have consistently berated online communications?

8. If 90% of investing is just showing up, what's the other 10% about?

January, the two-headed month, is there for your taking, Fool. . . enjoy it!

Tom Gardner


Stock Change Bid -------------------- AOL - 3/8 32.88 T + 3/8 41.88 ATCT + 1/4 13.50 CHV + 5/8 65.63 GM +2 3/4 58.50 IOM --- 17.38 KLAC -1 1/4 34.13 LU - 3/8 45.88 MMM +3 1/8 86.13 NCR --- 33.75 COMS -1 72.25
Day Month Year History FOOL +0.55% 0.55% 0.55% 168.35% S&P 500 -0.50% -0.50% -0.50% 60.78% NASDAQ -0.80% -0.80% -0.80% 77.83% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.38 589.77% 8/5/94 680 AmOnline 7.27 32.88 352.02% 8/13/96 250 3Com Corp. 46.86 72.25 54.18% 8/12/96 110 Minn M&M 65.68 86.13 31.13% 8/11/95 125 Chevron 50.28 65.63 30.51% 8/12/96 280 Gen'l Moto 51.97 58.50 12.56% 8/12/96 130 AT&T 39.58 41.88 5.80% 1/2/97 8 NCR 33.75 33.75 0.00% 10/1/96 42 LucentTech 47.62 45.88 -3.66% 8/24/95 130 KLA Instrm 44.71 34.13 -23.68% 10/22/96 600 ATC Comm. 22.94 13.50 -41.14% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 34923.75 $29860.62 8/5/94 680 AmOnline 4945.56 22355.00 $17409.44 8/13/96 250 3Com Corp. 11714.99 18062.50 $6347.51 8/12/96 110 Minn M&M 7224.44 9473.75 $2249.31 8/11/95 125 Chevron 6285.61 8203.13 $1917.52 8/12/96 280 Gen'l Moto 14552.49 16380.00 $1827.51 8/12/96 130 AT&T 5145.11 5443.75 $298.64 1/2/97 8 NCR 269.00 269.00 $0.00 10/1/96 42 LucentTech 1999.88 1926.75 -$73.13 8/24/95 130 KLA Instrm 5812.49 4436.25 -$1376.24 10/22/96 600 ATC Comm. 13761.50 8100.00 -$5661.50 CASH $4600.04 TOTAL $134173.92 Transmitted: 1/2/97