Fool
Portfolio Report
Monday, December 22, 1997
by Jeff Fischer
(TMFJeff@aol.com)
ALEXANDRIA, VA (Dec. 22, 1997) -- After a strong day -- with the S&P rising 0.73% and the Fool sleighing ahead 1.82% -- it seems oddly appropriate to look at lessons we've learned in the Fool Port from mistakes made over the past year, rather than to gloat on today's success.
First, Iomega (NYSE: IOM) split its stock 2-for-1 after the market closed in order to have more shares for employee stock options. Tomorrow Iomega will open at around $12.25, and owners will hold twice as many shares. The Fool now owns 1,960 shares of Iomega at a cost basis of $1.28 per share, following several splits. Iomega will probably be one of the most active stocks on the NYSE even more frequently now -- after having been a dead, slow stock on the Nasdaq a mere three years ago.
Rising sharply today were America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN) on news -- not a giant surprise -- that Internet commerce is accelerating rapidly from last year. An Internet retailers trade group reported that sales rose sharply over the Internet this season, compared to last year. More on this tonight in the Evening News.
Onto the topic...
I have a feeling that we'll be talking about this year's lessons for a long time to come, in part because they're not simple or one-sided. We sold partial positions in Iomega and America Online (NYSE: AOL) in April, but not due to stock valuation or any changes in the businesses. We sold merely because no cash is ever added to this initial $50,000 portfolio, and we had no money available for investing in other companies. Meanwhile, America Online and Iomega accounted for more than 50% of the portfolio, making the other holdings largely irrelevant. Even after selling partial positions in each, the two stocks accounted for over 30% of the portfolio and still account for 34% today.
With the proceeds from the sales, Trump Hotels (NYSE: DJT) was shorted (though we could have shorted it without any additional cash) and Innovex (Nasdaq: INVX) and Amazon.com (Nasdaq: AMZN) were bought. It's too early to draw any conclusions about these investments, but 17% has been made on Trump, over 40% on Amazon, and Innovex is down 20%. Instead of second-guessing the buys, let's second-guess the sells.
There is the old maxim: let your winners run and cut your losers. It's a good rule that we all personally believe here at the Fool, which is partially why the sells of our two most successful stocks hurt at the time, even though the alternatives seemed few. The overview: we invested about $20,000 between Amazon and Innovex after raising $32,000 from partial sales of Iomega and AOL. In part thanks to recent profits on Trump, we now still have $24,000 in cash to invest (which is another lesson that we'll cover sometime: having so much cash sitting out of the market for so long.) Since we sold our largest winners, though, they have continued to win. Iomega has gained 40% from the $17.75 sale price, and AOL has risen nearly 100% from its $45.50 sale price.
Ouch!
But we're not surprised, which is what also hurts. There is a very good reason that we kept the two stocks as the largest positions in the portfolio: we believe in them the most. We expected them to do well. So why sell?
Where else could we have gotten cash if we hadn't sold AOL and Iomega? Well, perhaps from our losers. Selling all of our losers at the time of the AOL and Iomega sales on April 17 would have raised enough cash to make our subsequent purchases. With $5,000 in portfolio cash on April 17, selling KLA-Tencor (Nasdaq: KLAC), 3COM (Nasdaq: COMS), and ATC Communications (Nasdaq: ATCT) on that date would have raised $16,000, giving us $21,000 total, or exactly what we later invested in Amazon and Innovex. Let's review what AOL and Iomega have done since April 17 compared to what our losing stocks have done:
Stock 4/17/97 12/19/97 Change AOL $45.50 $85 +90% IOM $17.75 $25 +40% ATCT $5.63 $1.63 -71% COMS $30.25 $32 +6% KLAC $42.38 $38 -10%The three losing stocks in the portfolio in April have continued to lose to the market. (ATCT was sold at $3 5/8 in the summer.) While dumping these three stocks in April would not have cleared the "dilemma" that was represented by America Online and Iomega being the majority of the portfolio (in fact, at these prices, AOL and IOM would now account for about 70% of the portfolio), at least the sale of the losers would have resulted in a much better portfolio performance. The Fool would be crushing the market if AOL and IOM had been kept and the losers sold. (What is also interesting to me is that the losing stocks are the ones that we don't understand as well as IOM and AOL, and so it would have made more sense intellectually to sell these stocks, even though it didn't make as much sense mathematically -- at the time.)
One of our concerns, though, was giving the wrong message to readers by having just two stocks represent a majority of the portfolio. New Fools see this and would ask if that were common or correct. Perhaps our answer should have been (and will be in the future): Yes, this is common, because you let your winners run. Winners may become a large part of your portfolio, even overly large, but that's a sign of a successful investment. You should hardly be ashamed of it.
I can't speak for Tom and David today, but I know that they agree in principle to let your winners run. Fools agree on that concept. The portfolio presented other dilemmas, though, and the new medium was part of it, too. For example: What did we want to convey to readers about diversification? And, why couldn't we add cash to the portfolio instead of selling? (Answer: It would confuse old and new readers alike, and make tracking performance more confusing.) While selling losers did make sense, but then AOL and Iomega would have made up even more of the portfolio -- and what would that tell readers, especially new Fools? So in the end, where do we get the extra cash to invest in new ideas? You can imagine the questions that went around the table as the decision was made. Finally, it came down to the partial sales as answering the most problems, more so than any other solution.
Other topics that are lesson-related: Usually when we sell we aim to have replacement stocks in the wings. We sell when we find something better. In this case, we had ideas lined up, but we didn't have execution on any new buys for several months after the sells. And, to date, the buys have required less cash than we raised by the sales. If we had first lined up the buys for certain, we would have known how much money we needed and perhaps the idea of selling our losing stocks instead of AOL and IOM would have had more of a voice. As it was, we thought that we needed more money than the losers would have provided by themselves.
Finally, while the S&P has risen nearly 30% this year, the Fool spent two-thirds of the year with between 15% and 24% cash in the portfolio (15% right now). This was never intentional, but it was a function of not finding the right investments. In our favor, it's much better to be patient when investing than to rush into any stock for the mere sake of being invested. Also in our favor, it's great that the portfolio has done as well as it has while having so much cash, even beating the Nasdaq (though we'll never be happy with underperformance to the S&P, of course.) Going forward, we'll continue to take our time with any investment decision, though, rather than rush to have the money in a stock. After all, if you want your money in the market, invest in the S&P. If you want to invest in individual stocks, you're not really investing "in the market" -- you're investing in individual businesses, and it takes time to find great ones.
In 1998 we're looking forward to the chance to beat the S&P again, and to increase the large historical lead that the portfolio holds. In the meantime, we hope that the portfolio and the actions taken have been educational to everyone on some level -- and that our mistakes and Tom and David's material losses have benefited readers by way of education. If you're interested in talking about this past year more, visit the Lessons Learned message board in the Investment Strategies area.
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TODAY'S NUMBERS
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Day Month Year History FOOL +1.82% -0.58% 23.36% 229.22% S&P: +0.73% -0.18% 28.75% 108.05% NASDAQ: +0.48% -4.28% 18.67% 112.73% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 89.88 1135.76% 5/17/95 980 Iomega Cor 2.56 24.56 859.17% 10/1/96 42 LucentTech 47.62 76.94 61.58% 8/12/96 130 AT&T 39.58 63.94 61.55% 8/11/95 125 Chevron 50.28 75.19 49.52% 9/9/97 290 Amazon.com 38.22 56.31 47.33% 8/12/96 110 Minn M&M 65.68 84.25 28.28% 4/30/97 -1170 *Trump* 8.47 7.00 17.34% 8/12/96 280 Gen'l Moto 51.97 59.88 15.20% 12/19/97 17Raytheon 53.21 49.75 -6.50% 8/24/95 130 KLA-Tencor 44.71 39.81 -10.96% 6/26/97 325 Innovex 27.71 21.00 -24.21% 8/13/96 250 3Com Corp. 46.86 32.75 -30.12% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 31905.63 $29323.76 5/17/95 980 Iomega Cor 2509.60 24071.25 $21561.65 9/9/97 290 Amazon.com 11084.24 16330.63 $5246.39 8/12/96 130 AT&T 5145.11 8311.88 $3166.77 8/11/95 125 Chevron 6285.61 9398.44 $3112.83 8/12/96 280 Gen'l Moto 14552.49 16765.00 $2212.51 8/12/96 110 Minn M&M 7224.44 9267.50 $2043.06 4/30/97 -1170*Trump* -9908.50 -8190.00 $1718.50 10/1/96 42 LucentTech 1999.88 3231.38 $1231.50 12/19/97 17Raytheon 904.57 845.75 -$58.82 8/24/95 130 KLA-Tencor 5812.49 5175.63 -$636.87 6/26/97 325 Innovex 9005.62 6825.00 -$2180.62 8/13/96 250 3Com Corp. 11715.99 8187.50 -$3528.49 CASH $32484.33 TOTAL $164609.89