Fool Portfolio Report
Friday, January 3, 1997
by Jeff Fischer (MFBudFox)

ALEXANDRIA, VA., January 3, 1997 -- To best serve the Fool this year I'm beginning by asking what your thoughts are about this part of Fooldom. This area of our community -- the Fool Port column -- serves many purposes, among them: to recap the daily news of Fool stocks, to explain investment strategies, to amuse, to educate, to write of Fool stock successes and failures, and to address problems and wrongs in the investment world, among other myriad topics (space travel, out of body experiences, Aunt Mabel, etc...).

Any service is best tweaked when the community voices their opinion about it, so if there are any changes you'd like to see in the Fool recap, from small to giant, drop me an e-mail at mfbudfox@aol.com. For subject, please enter "Fool Recap Ideas," so I know which mail to prioritize. If you have any advice, criticism or applause, things you'd like to see written of more often (or written of less frequently), recaps shortened or lengthened, topics you'd like addressed in the future -- anything at all -- drop me a note.

Realistically, I'm looking for over-all, big picture (yet probably subtle) changes which could benefit the majority of us if implemented here. I'll share your ideas with Tom and David, of course, and within the next week or two, if I get enough suggestions, I'll share the most wanted "tune-up" suggestions per your e-mail right here, and we'll take it from there. All coherent and Foolish suggestions are welcome!

Now, Fools, here we are in 1997....

The market is off to a volatile start this year, dropping sharply on day one, only to recover before the close, and now rising generously on day two. The S&P 500 rose 1.50% today, while the Nasdaq gained an extremely impressive 2.35%. The Fool gained 1.04%, lagging as Iomega faltered and some Dow heavies rested after yesterday's advances.

Stocks just completed their best two-year performance in the last forty years (as measured by the Dow Jones Industrial Average). The Dow rose 68% during 1995 and 1996, while the Nasdaq rose about 62%. During these two years, the Dow set 113 new highs (a record number of new highs for any two-year period, and representing more than one new high per week), while making 44 new highs in 1996. These two great years have "capped" the best fifteen-year period in the market's history. But as Tom and David wrote in their New Year Letter, the market has no memory of the past.

The market doesn't remember anything, though investors certainly do, but even that means little. If anything, the recent strong performance causes many investors to be more "cautious." As another record year ended three days ago and 1997 began, everyone wanted to know where the market was going now (as if a turn of the calendar represents a whole new world in which investors must survive), and many headlines stated growing uneasiness, questioning, and nervousness about the market.

According to Investors Business Daily, 32% of investment "advisors" are bearish, while 47% are bullish. (Of course, the more bears, the more likely the market will outperform, is the argument -- the numbers are a contrarian indicator). While the short interest ratio (betting stocks will fall) on the New York Stock Exchange is at 6.6%, very near the five-year and twelve-month high. This is known as another contrarian indicator -- the argument being that the more shorts, the more likely the market will rise. The highest short interest ratio in the last five years was reached on September 9th, 1996. Since then, the market has risen sharply, handing shorts their heart on a stick. The short ratio is still nearly as high, though.

But Investor psychology means very little in the long run anyway. In fact, over the long haul, it holds ZERO say in where the market goes. Investor psychology is always "levelled out," made null and void by fundamentals, and by factors much larger than investors' sentiment; and over time, but constantly, the musings of all the "little people" -- people called investment advisors and market analysts -- are always pushed aside in the wake of the market's own force of movement, which is determined by world events.

Stocks move on corporate earnings, interest rates, inflation, bond prices, world demographics -- and all are intricately related to one another. If a person is trying to predict various "market indicators" and the subsequent market moves, they may as well attempt to predict *all* world events. All market indicators depend upon an infinite variety of world events -- planned and so many unplanned -- for their direction, such that nobody can truly guess where we're going. Perhaps the most we can do (if we care to do anything at all in the "forward-looking" arena) is to look at where we currently stand.

One of the simplest measures -- and I feel one of the most relevant -- is the price-to-earnings ratio of the market averages. Earnings drive stocks. The P/E ratio on the Dow Jones Industrial stocks currently stands at 19 times earnings. Historically these stocks trade at a price-to-earnings ratio of around 15, but earnings grew more aggressively than usual the past few years, while U.S. interest rates remained low and inflation lower (among so many other "stock-positive" factors). But what good are the current ratios anyway? They're already old news. Forward-looking investors want to know what companies are going to earn in the future. Projections exist, of course, but nothing is guaranteed.

Currently, where do any "forward-looking" thoughts bring us? Back to this:

The 1990's have been unlike any other in the stock market's history. In fact, the last fifteen years have been extraordinary. Now what? This recap has quickly come full circle: after such a great performance, what will stocks do next?

Welcome to the "Magical Mystery Tour" called 1997... and beyond. Nobody could predict the market in the past, and nobody will be able to predict it in the future. Trying to time the market, trade the market, "out-guess" the market.... Get real. If you consistently had that power, you'd have the power of a God. Nobody knows how economic factors will shape 1997, if inflation will crop up, if corporate earnings will slow, or what interest rates will do (not to mention the hundreds of coming world events that will help shape the investment landscape). The mere thought of predicting the market (essentially, predicting the world) is ludicrous.

The only way to invest with consistent success is to invest in proven long-term strategies. Strategies which have consistently outperformed the unpredictable years of the past, and which promise to outperform the unpredictable years of the future. Strategies which, because they have proven to work fundamentally, numerically, and unemotionally in the past, are much more reliable than human thought or human figuring which tries to look into and react to the future. A strategy knows no logic but itself, while peoples' logic (money managers) is flawed because it tries to follow so many different forms of changing "reason."

Thursday evening, Tom's recap poignantly listed different "investing scenarios" and what your money accomplishes for you in each one. The truths in Tom's excellent recap represent all that you need to know to invest successfully for a Life-Time. One simple strategy referenced and proved in that one recap. Print it out, employ it, and that's that, while each coming world event and stock market drama can be damned. Not to mention all the daily predictions and "concerns" cast out by so many market "analysts."

Whatever 1997 brings, let the mystery unfold, day-by-day. As usual, The Fool is not going to try to guess the market, or even worry about it, and of course we're never going to run from it. The market outperforms everything else over time. Everything else. We'll have down years here and again, but 25 years from now the Fool Port is going to have grown so LARGE it will make you sick. I hope that you're invested likewise, Foolishly, in a strategy that 10 years, 15 years, 25 years from now you'll be as glad that you employed the strategy as Fools plan to be with their Foolish Four.

The Dow's rise on Friday was the sixth largest in history. The rise of the Nasdaq was even more impressive percentage-wise, as Intel Corp led technology shares higher. The Fool's 3COM (Nasdaq: COMS) enjoyed a $3 3/8 rise, AMERICA ONLINE (NYSE: AOL) rose $2, and KLA INSTRUMENTS (Nasdaq: KLAC) rose $1 3/4.

Finally, yesterday the Fool was given yet another stock from AT&T (NYSE: T), which continues to "spin and hurtle huge pieces of itself off into space;" recently Lucent Tech was spun-off, and yesterday NCR CORP (NYSE: NCR). Shareholders received 0.0625 shares of NCR for each share of AT&T they own, thus the Fool received a big 8 shares of NCR, which has been duly added to the Fool Port. (Please note, though, our cost-basis on AT&T has not yet been adjusted, as the information needed for the adjustment isn't available. The spin-off will lower our AT&T cost-basis somewhat).

NCR (once known as National Cash Register) was bought by AT&T in 1991 for $7.5 billion after much takeover bickering. NCR was AT&T's entry into the PC business, but the attempt consistently lost money, and AT&T is probably happy to be rid of NCR. Last quarter NCR reported a loss of $33 million, and it has now lost $116 million in the first three quarters of its current fiscal year. The stock rose $1 1/2 today to $35 1/4.

So, thus far in 1997 we've had a rough day and a great day. The "Magical Mystery Tour" has begun yet again -- or simply continues. "Magical Mystery Tour" isn't a bad name for the future as a whole. Why so, you ask? First, the Beatles need more publicity, and two, what's more mysterious than the future? Nothing. So we will write about it each day as it unfolds, and over time all Fools will enjoy the fruits of long-term investing.

Have a Foolish weekend!

TODAY'S NUMBERS


Stock Change Bid -------------------- AOL +2 34.75 T - 3/8 41.50 ATCT + 1/8 13.63 CHV + 1/2 66.13 GM - 1/2 58.00 IOM - 3/8 17.00 KLAC +1 3/4 35.88 LU --- 45.88 MMM -1 1/2 84.75 NCR +1 1/2 35.25 COMS +3 3/8 75.63
Day Month Year History FOOL +1.04% 1.59% 1.59% 171.13% S&P 500 +1.50% 0.99% 0.99% 63.18% NASDAQ +2.35% 1.53% 1.53% 82.00% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.00 574.88% 8/5/94 680 AmOnline 7.27 34.75 377.80% 8/13/96 250 3Com Corp. 46.86 75.63 61.39% 8/11/95 125 Chevron 50.28 66.13 31.50% 8/12/96 110 Minn M&M 65.68 84.75 29.04% 8/12/96 280 Gen'l Moto 51.97 58.00 11.60% 8/12/96 130 AT&T 39.58 41.50 4.86% 1/2/97 8 NCR 33.75 35.25 4.44% 10/1/96 42 LucentTech 47.62 45.88 -3.66% 8/24/95 130 KLA Instrm 44.71 35.88 -19.76% 10/22/96 600 ATC Comm. 22.94 13.63 -40.60% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 34170.00 $29106.87 8/5/94 680 AmOnline 4945.56 23630.00 $18684.44 8/13/96 250 3Com Corp. 11714.99 18906.25 $7191.26 8/12/96 110 Minn M&M 7224.44 9322.50 $2098.06 8/11/95 125 Chevron 6285.61 8265.63 $1980.02 8/12/96 280 Gen'l Moto 14552.49 16240.00 $1687.51 8/12/96 130 AT&T 5145.11 5395.00 $249.89 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 4663.75 -$1148.74 10/22/96 600 ATC Comm. 13761.50 8175.00 -$5586.50 CASH $4600.04 TOTAL $135563.92 Transmitted: 1/3/97