Fool Portfolio Report
Thursday, March 20, 1997
by Tom Gardner
(TomGardner)
ALEXANDRIA, VA., (March 20, 1997) -- Back in the day, not so long ago, a day like this wasn't twenty-six-point-two miles out of the realm of possibility. The S&P 500 fell; the Nasdaq rose; The Fool dusted both. Once routine, now nearly unthinkable.
The Nasdaq has fallen 2.5% for the year. The Fool Portfolio, as you know, is down a head-rattling 10%. And the S&P 500 has risen over 5.5% in 1997. All the giant companies housed within the S&P index fund are far outpacing their smaller brethren this year. Nor Microsoft nor Intel can carry the Nasdaq, even though both have risen more than 15% since January 1st. Small companies are getting socked.
In fact, in at least one way, these past few months are starting to take on the look of the go-go-go-GO period of the late-'60s and early-70s -- when investors bet on what seemed a sure-think from the market giants. Today, capital is finding its way to our multi-national, very profitable corporations. From Nike to Intel to Microsoft to Gillette to Pfizer to General Electric to Coca-Cola -- well, you name the company with the following traits:
- more than $5 billion in sales
- more than 40% of sales internationally
- profit margins over 8% (heck, ideally over 15%)
- cash in the bank
- aggressive controls on debt
- a world-class brandname
These companies are attracting investors across the globe right now. And it makes sense. After all, they manage their business like a small business -- keeping careful watch on the flow of dollar bills, particularly since that money is earmarked for the shareholders!
And as these megacorporations have proven over and again that they know their customers, that they respect their shareholders, and that they take pride in the quality of their work and the growing value of their company, word of mouth has spread in investment communities across the world. These businesses win in the most well-regulated marketplace on the planet. The superior opportunities in our safe-haven market is just what investors in Okinawa, Japan and Granada, Spain and Berkeley, California are cottoning to.
It makes sense; it makes a helluva lot of sense.
The problem is that as we engage in a global flight to quality, stock prices temporarily get ahead of the earnings momentum. Coca-Cola has grown at a rate of 30% per year over the last twelve years. Is the valuation temporarily ahead of the business? If so, the community of investors asks, "How temporarily? Should we sell out now and buy back later?"
For those investors that need to withdraw capital from the stock market over the next five years, any temporariness may seem frighteningly permanent. Why? Because the possibility exists than when you wake up on the morning of March 20th in the year 2002, the Dow will trade at 7000. The Nasdaq at 1300. The S&P 500 at 800. And a journey there from here might scare the ears off Mickey Mouse -- resembling more the downward pitch of The Viper at Magic Mountain Park in California than the wandering way of The Gentle Lamb ride at your local mall.
The path might look something like this:
_ _ 7000 \ / \ / \ / \ The / \ Dow / \ Scream / \ / \ / \_ _ _ __/ 4000 l l 1997 Year 2002
There's just the sort of ride that forces you to ask the tough questions about your life:
- Why was I born to this world?
- Where will I go when I'm gone?
- Was Nipsey Russell or Charles Nelson Reilly better at Match Game?
It's an earthward plunge that every investor has to be prepared for, because if it doesn't happen in 1997 or 1999 or 2008, it's going to happen in 1998 or 2004 or 2010.
The stock market will lose fully 40% of its value over a one- or two- or three-year period at various points over the next seventy years. And we may be at the cliff's edge this very evening. The S&P 500 which fell three points today to 782.65 may not see these heights again for a hundred fortnights.
Who knows?
The equities investor may be in for the bitterest of winters, like those of which Mr. Pasternak, Mr. Tolstoy and Ms. Akhmatova wrote. And then they're only to be followed by the heaviest of summer swelters, which sent crook-legged old men with wooden chairs searching for the shade of a cottonwood tree and whatever breeze might run off the creek in the poetry of Langston Hughes.
The stock market, unfortunately, doesn't know if you're planning to retire in three years. It pays no heed to your grand plans. It doesn't care what your cost basis is in any given stock. It makes no short-term promises. It is more than willing to subvert any intermediate-term suggestions. It'll walk away at the altar, with a shiny ring in its pocket.
This has proven out time and again in the 20th century. Whenever investors have borrowed heavily to "get in on the climbing market," trouble and a measure of chaos have visited the unprepared. Of course, what's so unfortunate about this is that no investor seeking enduring wealth from our stock market needs to risk anything more than whatever pittance they can afford to put away for ten years. Anything from $100 to $5,000 or beyond will do.
Consider the investor in 1947, who was later forced to suffer near-50% declines in the early 1970s. With $5000 at the start, and 15% annual growth, her account is still valued at $5.4 million today. She rode the Viper Ride, yelled the Dow scream. She suffered icicles and drought. And she survived the slings and arrows of what at times was a most outrageous misfortune.
But what did you say was the value of that today? 50 years of 15% annual growth turns $5,000 into $5.4 million.
When I think on the many veteran investors we know and have met over the past two years who are sitting on numbers much like those above, I am thunderstruck and baffled by the critical comments of Michael O'Higgins in tonight's coverage of market valuation by Louis Corrigan: (Rogue Media: How Now, Dow?). In it O'Higgins says:
"Only those people, perhaps like yourself
or the Gardner brothers, who haven't been
around long enough to have been through
some market cycles and haven't studied
financial history, or honestly believe this
malarkey that this is truly a new era" could
be anything but bearish."If you've done your homework, you have to
conclude that stocks are at the most
overvalued level in history. I'm unfortunately
among that group."
It's with such a great hesitance that I write the succeeding sentence, because we have a great deal of respect for Mr. O'Higgins. But I do think this comment begs a response.
1. I have to remind Mr. O'Higgins that he was stridently bearish on stocks in Barrons magazine in the spring of 1995, with the Dow Jones Industrials trading at 5000, or 40% below its present perch.
2. It was The Motley Fool's Randy Befumo who tirelessly worked back through the Dow Dividend numbers, correcting substantial, consequential flaws in the work performed by the O'Higgins Organization -- without ever making public mention of it.
3. Would Mr. O'Higgins really advise private investors with a thirty-year time horizon to pay commissions and capital-gains taxes today in an attempt to time the market tomorrow? If 15% annual growth can be had in stocks between here and 2027, should the long-term investor bother guessing at entry and exit points -- particularly when we consider that a professional like Mr. O'Higgins mistimed his 1995 exit by more than 40%?
The Motley Fool has never, is not now, nor will ever try to call the direction of the market. We're as startled as the next bloke by the performance of stocks in the 1990s, pleasantly surprised, and exceedingly happy that we've had our money invested in historically the strongest investment vehicle on the planet right through. We note the many outstanding investors in this country with far more years in the market than Mr. O'Higgins that also have chosen and still choose not to time the market. They too have enjoyed the 40%+ climb over the past two years.
I also must add that we do not know of an organization or a financial writer that has so diligently covered the subject of shorting stocks as The Motley Fool. Stocks rise and fall, and profits can be made either way. Though the trained market historian does note that the shorter of the stock market in the 20th century lost all of his money every six years.
So our eyes are pretty wide open to the historical performance numbers. I do confess that we're much harder at work on the analysis and valuation of individual companies (both healthy and ill) than on the price of the entire market. Such careful focus on the entire market seems to imply there is no difference between Coca-Cola and Snapple.
We believe there is.
We also believe that we can compound 15% annual growth, between here and the year 2030. If we hit those numbers, I don't think the sharp decline that Mr. O'Higgins has been waiting on for over two years will hurt too terribly much. Our $120,159 today will be priced at $12.1 million.
That isn't going to happen by the end of next year. Or five years from now. That's the thirty-year plan. We agree that those who wait anxiously for short-term reward will, I fear, be left ringless at the altar -- either because the market rose rapidly while they waited or fell dramatically as they counted on its ascent. The performance is in the patience.
NOTE: 3Com beat the reduced earnings estimates of 46 cents by a penny after market close today. A Foolish compilation provides the news, and we'll have coverage of the conference call as soon as possible. (The conference call replay is available after 7:00 PM EST through 7:00 PM EST on 3/21 (800) 633-8284 (reservation # 2468610)).
Tom Gardner, Fool
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
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