Fool Portfolio Report
Monday, January 27, 1997
by David Wolpe (DavidWolpe)
ALEXANDRIA, VA., January 27, 1997 -- The investment world is a world of stories. Of winners and losers, ups and downs, story stocks and storied characters. Some larger than life, some run of the mill, some drones, some stars, some CEOs and CFOs; of workers, markets, governments.
It's like The City. Here at the Fool we may not be Officer Joe Friday, and this may not be Dragnet, but what follows, dear reader, is true. Is this a story of broker incompetence or criminal wrongdoing? No. It's a story of the status quo.
A young lady who works here at the office has a cousin who has a friend. A man we'll call Felix (name changed to protect him, and he is indeed an innocent). He spent his life working as a saxophone player, touring the jazz festivals of Europe and North America.
In 1989 this colorful gentlemen eased into his retirement, that he might while away the hours writing letters, painting watercolors, and reading trashy novels. He hired a full-service broker to take care of his funds. The only stipulation was that he needed about $25,000 a year for living expenses. He came to this broker on the recommendation of friends, and, as time passed, he and the broker and the friends mingled socially.
The value of his funds at the beginning of 1989 was about $500,000. (Musicians will be quick to point out that he probably didn't earn this by blowing his reed, and they'd be right. Remember, the names and professions have been changed....) He had saved some, and inherited some, and had been extremely cautious with his money. So cautious, in fact, that for many years the money was just kept in the bank. He now lives frugally, driving a dented 1987 Toyota, which often gets buried by the snow removal crews when the street is plowed just outside his townhouse.
At the end of the first year the value of those same funds was, after commissions and the stipend, just under $500,000. Fools care little about such short-term results, so let's take the numbers out a few years. Each year for the past eight years, the returns have been the same: about 5% per year, after commissions. In other words, now, eight years later, his portfolio stands just where it started, at $500,000. Along the way he's gotten his $25,000 stipend, and the broker has conducted about 70 trades a year, generating commissions of around $10,000 annually.
What if he had invested that same $500,000 in the Foolish Four, over these past eight years? Where would his portfolio stand now, had he been investing in Dow heavyweights such as Sears, AT&T, Chevron, and General Motors, and had taken the twenty or so minutes a year it takes to figure out which are the current Foolish Four?
Here's how it would have played out:
Year Begin Return Sub-Total Stipend Total
1989 $500,000 9.04% $545,200 $25,000 $520,200
1990 $520,200 -15.06% $441,858 $25,000 $416,858
1991 $416,858 89.34% $789,279 $25,000 $764,279
1992 $764,279 28.77% $984,162 $25,000 $959,162
1993 $959,162 37.80% $1,321,725 $25,000 $1,296,725
1994 $296,725 -6.70% $1,209,844 $5,000 $1,184,844
1995 $1,184,844 37.71% $1,631,649 $25,000 $1,606,649
1996 $1,606,649 32.39% $2,127,043 $25,000 $2,102,043
1) his portfolio would now be worth over $2 million -- more than four times
its current value
2) his cost in commissions at a deep discount broker would have been negligible - $250 a year at most
3) He would have made eight trades a year (once in and once out for each of the stocks in the Foolish Four) instead of the 60 or 70 made for him by his broker.
4) His broker's bank account would have been lighter by about $80,000 in lost commissions.
The above numbers are illuminating not just for their market-thumping, full-service-multi-trader-pounding returns, but also for their fluctuations. At the end of 1990 Felix -- had he summoned the gumption to have bolted -- would have been facing a loss of over fifteen percent from the beginning of the year. His broker would no doubt have called him on the phone and said: "I told you so. You don't need this kind of risk at this stage of your life. There's a reason why I'm an expert, and a reason why I had you in safe funds, featuring a smooth blend of utility stocks, municipal bonds, T-Bills and porcupine futures. I've been carefully managing your risk, and providing you with a steady income." And Felix, assuming that he had survived the moment when the blood stopped flowing to his heart when he realized that that 15% loss meant a paper loss of $100,000, would very likely have reconsidered, gone home to his broker, and tearfully shredded The Motley Fool Investment Guide before feeding it to his roaring wood-burning stove on a cold winter's night.
But that did not happen. What did happen was this: our intrepid Fool here at HQ took it upon herself to send him a copy of The Motley Fool Investment Guide for Christmas. He read it and was thunderstruck. He was enraged, inspired, invigorated. So he sat down and wrote a letter, longhand, to his broker. He wrote and rewrote, struggling with the fact that this man was now an acquaintance, and he'd have to suffer the embarrassment of the occasional awkward encounter at a social function. So he put the letter down and let it sit.
The night before mailing it, he decided to get a second opinion. He called the nephew of his friend (the one who'd arranged the introduction) and ran the plan by the young man. The response was faxed back that night to the local Kinko's, and hand-delivered. It laid out a list of reasons not to do this. The list included: what are the tax consequences? how do you have any reason to think that doing anything else would generate better returns? what is the risk? how do you know what you're getting into? And contained the conclusion, in capital letters: I DO NOT RECOMMEND THIS MOVE.
Felix was so alarmed that he tore up his own letter.
And, fellow Fools, to this day, that is where his money sits. Earning five percent, and gathering moss, we may say, and fattening the commission kitty of a man who may well be honest and well-meaning, but is part of a system that needs change.
Which is a segue we cannot resist. What changed today in the Fool's portfolio, which is now up 173% in its first 29 months of existence? Today the portfolio fell with the market, losing 0.85% to the Nasdaq's loss of 0.81% and the S&P's 0.71% drop.
America Online (NYSE: AOL) continued to fall under lawsuit woes, while 3Com (Nasdaq: COMS) fell $4 in a weak day for networking stocks, despite the company's announcement of a special conference with partners IBM (NYSE: IBM) and Cascade Communications (Nasdaq: CSCC) on Tuesday. At the conference the three companies will discuss a new IP switching agreement. Also, General Motors (NYSE: GM) fell despite a dividend increase and the announcement of a $2.5 billion share buy-back, which MF DowMan wrote about in the Foolish Four update. For the good, Iomega (NYSE: IOM) rose $5/8 as investors anticipate earnings Tuesday after the market closes, and, finally, 3M (NYSE: MMM) rose $1 on no news.
To close: this true story I wrote of tonight is sadly being played out all across the country, each day, every year, as brokers get fatter off the perception they feed the public, the perception of "reliance." "You need me," they say. It just isn't true, as Fools know.
Stock Change Bid -------------------- AOL -1 7/8 34.25 T + 3/8 38.75 ATCT + 1/8 12.25 CHV + 1/8 66.25 GM - 5/8 61.88 IOM + 5/8 19.00 KLAC -1 1/2 39.75 LU - 5/8 52.38 MMM +1 82.00 NCR - 3/8 38.63 COMS -4 64.63
Day Month Year History FOOL -0.85% 2.61% 2.61% 173.85% S&P 500 -0.71% 3.28% 3.28% 66.88% NASDAQ: -0.81% 4.79% 4.79% 87.84% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 19.00 654.28% 8/5/94 680 AmOnline 7.27 34.25 370.93% 8/13/96 250 3Com Corp. 46.86 64.63 37.91% 8/11/95 125 Chevron 50.28 66.25 31.75% 8/12/96 110 Minn M&M 65.68 82.00 24.85% 8/12/96 280 Gen'l Moto 51.97 61.88 19.05% 1/2/97 8 NCR 33.63 38.63 14.87% 10/1/96 42 LucentTech 47.62 52.38 9.99% 8/12/96 130 AT&T 39.58 38.75 -2.09% 8/24/95 130 KLA Instrm 44.71 39.75 -11.10% 10/22/96 600 ATC Comm. 22.94 12.25 -46.59% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 38190.00 $33126.87 8/5/94 680 AmOnline 4945.56 23290.00 $18344.44 8/13/96 250 3Com Corp. 11714.99 16156.25 $4441.26 8/12/96 280 Gen'l Moto 14552.49 17325.00 $2772.51 8/11/95 125 Chevron 6285.61 8281.25 $1995.64 8/12/96 110 Minn M&M 7224.44 9020.00 $1795.56 10/1/96 42 LucentTech 1999.88 2199.75 $199.87 1/2/97 8 NCR 269.00 309.00 $40.00 8/12/96 130 AT&T 5145.11 5037.50 -$107.61 8/24/95 130 KLA Instrm 5812.49 5167.50 -$644.99 10/22/96 600 ATC Comm. 13761.50 7350.00 -$6411.50 CASH $4600.04 TOTAL $136926.29
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