Fool Portfolio Report
Wednesday, January 28, 1998
by Tom Gardner (TomG@fool.com)

ALEXANDRIA, VA (Jan. 28, 1998) -- The Fool Portfolio climbed 3.15% today on the strong performances of America Online, up $3 1/16 to $94 5/8; Lucent up $2 3/8; Amazon.com up $3/4; and recent Fool-Port inductee, 3Dfx Interactive, up $4 3/4 to $27.

3Dfx announced strong earnings after market close yesterday -- which included a clean doubling in gross margins from 24.4% to 48.9% from the same period a year ago. For the quarter, 3Dfx beat high-end earnings estimates by 50% (coming in with 15 cents per share versus estimates of 10 cents). The company also increased investments in its future (research & development) to $4.86 million from $2.29 million in the year-ago period.

Drop by the 3Dfx message board for some extraordinary contributions from product experts, accountants, and small-cap investors. As is unfortunately often the case with small technology businesses, the national financial media has mostly blown this story while the technology media is right on top of it doing a bang-up job. That speaks volumes in favor of reading through trade magazines in the industries you love to follow before accepting the coverage by the national, often-Hard-Copyish financial publications.

Despite its glorious up-move today, the Fool Portfolio finds itself badly trailing the stock market in 1998 (thanks primarily to what I consider a temporary decline in the value of our Iomega holding). But even despite this recent underperformance, the Fool Portfolio finds itself nearly 100 percentage points ahead of the S&P 500 since August 1994. When you subtract the often high management fees and taxable distributions from mutual funds, then compare the baseline performance of these funds to the S&P index fund and to the Fool Portfolio, you'll understand why we're content in pointy slippers and motley rags.

Managed mutual funds are typically bad news... but there's something much, much worse.

Taking an additional step back from the paint to see the broader canvas, a fuller context of American finance, I can't help noting the substantially negative returns that so many people are struggling through today via credit-card debt. The load of consumer debt carried on credit cards is weighing heavily on individuals and families. With the fed funds rate at 5.5%, the average 18% interest rate charged by credit card providers is simply outrageous. As the Fool Portfolio chugs ahead, in fits and starts, we should constantly remind ourselves that many Americans are seeing their savings and investing power disintegrate in 18% annual bites as they pay usurious rates on their credit cards.

Believe it or not, this happens as much because of the lack of basic financial education in our schools as because of temporary hardship. Ahh, but Fool... the location is disappointing, but the direction is quite promising! An increasing number of Americans are now focusing their efforts on getting rid of that expensive, short-term debt. November marked the first month in 4 1/2 years that consumer debt was paid down. Foolishness is walking 'round our orb like the sun, beginning to shine everywhere. There's a change afoot.

But when many have eliminated short-term debt and do start saving, they're often clueless about what to do with that money -- sit it in a bank, take a stock tip from a friend, buy real estate, what to do? How would any of us have known? With that in mind, a few years ago we Fools began prattling in our message folders about the merits of initially (and perhaps permanently) investing that hard-core savings into very large, very profitable consumer franchises. These have made for some of the greatest investments this century.

We expect that to continue through the 21st century.

Now, readers of this Foolish column are aware that out of our online discussion, I designed a portfolio of ten stocks to be held for a minimum of ten years. The logic held that investors would minimize their long-term risk, would limit their exposure to the high fees and tax burdens perpetuated by Wall Street, and would invest in familiar companies whose products and services they used every day, week, or month.

That group of ten stocks ("The Simpleton Portfolio") then gave birth to a second ten-stock portfolio -- The MoneyHeavy Portfolio. And demand from readers has now driven us at Fool Global HQ to launch a real-money portfolio online dedicated to buying large-cap brand-name businesses. The launch of that portfolio is set for tomorrow. It will appear under the moniker The Cash-King Portfolio and all of the details of the undertaking (and the first report tomorrow) can be found at www.fool.com/cashking.

I'd like to present six basic guidelines for that portfolio today, but first, let's take a look at the performance of the Simpleton Portfolio (released in July 1995) and the MoneyHeavy Portfolio (released in May 1997):

The Simpleton Portfolio

7/95 1/28/98 Purchase Present Total Company Price Price Gain Dell Computer $8.03 $97.25 +1111% Sun Micro $12.69 $47.75 +276% America Online $26.56 $92.00 +246% Gap $11.58 $39.00 +235% Cisco Systems $18.42 $60.75 +230% Microsoft $47.81 $146.00 +205% Intel $34.13 $80.25 +135% Hewlett Pack. $39.94 $63.50 +59% Texas Inst. $35.47 $54.00 +51% Silicon Graph. $43.25 $14.00 -68% Total Returns n/a n/a +248.0% S&P 500 556 973 +75.0%


The Money-Heavy Portfolio

5/97 1/28/98 Purchase Present Total Company Price Price Gain Dell Computer $55.19 $97.25 +76.2% Gap $22.83 $39.00 +70.8% Pioneer Hi-Bred $69.63 $99.75 +43.3% Cisco Systems $44.50 $60.75 +36.5% Microsoft $125.88 $146.00 +16.0% Johnson & John $58.88 $67.75 +15.1% Gillette $87.75 $100.50 +14.5% Intel $81.88 $80.25 -2.0% Coca-Cola $67.50 $63.25 -6.3% Oxford Health $65.13 $14.50 -77.8% Total Returns n/a n/a +18.6% S&P 500 844 973 +15.3%

Both portfolios are beating the market -- the Simpleton Portfolio by a substantial margin. But there are two important additional values that long-term investing in superior business brings with it:

First, an investor isn't burdened with the largely thankless task of following ticker symbols and watching stock prices blip and blap, flit and flat, sputter and run from day to day. Rather, they're charged with partnering-up with a business and learning more about it in the years ahead.

Second, investors are not obliged to pay what, we believe, are unnecessarily inflated fees on Wall Street as well as unnecessary tax debits from active trading. Buying and holding great businesses has you making a small commission payment upfront and delaying capital-gains taxes until a much, much later date.

Often both of these burdens are ignored in mutual fund advertisements and performance ratings and media coverage of the financial industry -- making the market-beating, commission-free and tax-deferred returns of the MoneyHeavy and Simpleton portfolios all the more alluring.

Ok, now let's take a look at six basic principles of the oncoming Cash-King Portfolio as we prepare to launch it tomorrow -- Thursday, January 29, 1998.

I. We've gone in search of great businesses

The builders of the Cash-King Portfolio have focused on three simple principles in our selection of businesses to invest in: 1) product demand; 2) strong financial management; 3) perserverance. In our daily portfolio reports, we'll concentrate on identifying these qualities in the businesses we select as well as elsewhere in the market (even in mid- and small-cap stocks).

II. We are buying overvalued stocks

Of the eight growth businesses whose shares we'll purchase in the next few weeks, all of them look overpriced by traditional valuation methodology. At 30-40-50x earnings, these large-cap stalwarts are, in my estimation, discounted 2-3 years forward. And that means we could see zero growth from our investments over a 24-36 month period. Furthermore, we could witness an interim decline in the value of the overall Cash-King portfolio of 30%.

Who knows? We're prepared for it, though. We expect to be substantially rewarded in the decades ahead.

III. We aren't going to sweat short-term volatility

This potential 2-3 year "silent" period of no returns coupled with a potential 6-12 month "storm" doesn't faze us and won't shake us from our mission -- to accumulate wealth and build financial security over a 20-30 year period. It's our belief that, for long-term investors, buying business quality is 50-100 times more significant than buying temporarily undervalued stocks. For that reason, we're not going to try to time our entry into these investments.

We don't like the thought of potentially watching these stocks double again before falling back 10%; that's a painful way to save 10%!

IV. A statement of our 30-year goals

The CK Portfolio will start with a base of $20,000, and we'll add $2,000 new investment dollars to it every six months. Over a 30-year period, that makes for $140,000 of invested capital. Our aim is to turn those investments into more than $2.75 million in 30 years.

Along the way, we expect to witness 30-50% declines (at least) in the value of individual businesses that we hold and even 30-50% declines in the value of the overall U.S. markets. If, however, we can compound 15% annual growth from these investments during the thirty years, the short-term ups and downs won't much matter. Obviously, if this plays out, we'll be extremely happy in 2028 -- happy that we didn't put our long-term savings money into CDs, t-bills, municipal bonds, gold coins, lottery tickets, options-trading seminars, or non-essential real estate.

V. A reminder of personal responsibility

But, there's no guarantee that it'll play out that way.

Fool, if you're looking to mimic or model investments off this portfolio, you still need to take personal responsibility for your decisions. We aren't money managers; we don't charge 1% of your total assets to allow you to access The Motley Fool Online. And, most importantly, we don't think you benefit by closing your eyes and outsourcing the management of your money, of your opportunity, to others. If you prefer to have others do it for you, then just purchase shares of an S&P index fund, enjoy the long-term returns from America's five hundred largest companies, and methodically add savings to that fund.

It's worth stating that this forum has never acted as a money-management vehicle. Every inch of our editorial material has stated and restated this principle: Take responsibility for your financial decisions, Fool, and treat the stock market as a long-term savings vehicle while you learn more about American business. Do not blindly rely on the ideas of anyone in this forum without doing your own research -- whether his name is Tom Gardner or her name is TMF Madonna.

Without taking that responsibility, you'll never enjoy the intellectual or monetary rewards of your efforts. You'll be weakened by speculative ignorance on a subject that you can so easily control (if through nothing else, through an index fund).

Don't let that happen, Fool.

VI. Our daily portfolio reports

Our daily cash-king reports will typically be posted by 5 p.m. each night. You can expect them to concentrate intensely on a careful analysis of businesses, written in language accessible to the layman. Yes, we will write about return on invested capital, accounts receivable, inventory turnover, the principles of compounded growth, and about the individual products offered by our companies. But no, we won't write about them in a language that potential and existing investors, young and old, can't understand. If you don't understand a concept or a term that we've written about, please drop us an angry note in the Cash-King folder on our Investors Roundtable board. We'll be answering notes there daily in the years ahead.

Finally, our evening reports will also be unpredictable. Expect business book reviews, international guest writers, interviews with company management, disagreement among the core writers, contributions from Fools across America, and a motley stew of ideas that no other medium of exchange enables. This portfolio will be distinct not only because we expect it to beat 99% of what mutual funds and stock brokers offer America (active trading, high commission costs, annual capital-gains-tax bites, and consistent underperformance of the S&P 500). This portfolio will also be distinct because our writings will be profoundly impacted by contributions from you and Fool members across the world via The Network. (For this reason, we momentarily bow humbly to all those responsible for making this whole digital connection possible from day to day.)

If the Cash-King message folder on our website is any indication, we're going to learn an awful lot from one another there in the years ahead. To read the 11 Steps to Investing in Cash-King Stocks, to read our ongoing to discussion in the message folder, and to ask any questions, please drop by www.fool.com/cashking...

See you there and Fool on!

Tom Gardner

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Buy a Book and Get It Signed! -- Book Tour '98


TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN + 3/4 57.25 AOL +3 1/16 94.63 T -1 3/16 62.06 CHV - 5/16 76.13 DJT + 1/4 9.81 GM +1 7/8 59.25 INVX + 13/16 21.13 IOM + 1/16 8.13 KLAC +1 3/8 37.94 LU +2 3/8 86.94 MMM +3 15/16 84.50 RTN.A - 1/8 51.94 COMS + 13/16 31.88 TDFX +4 3/4 27.00 SPY + 7/8 97.72
Day Month Year History FOOL +3.15% -7.12% -7.12% 211.72% S&P: +0.87% 0.72% 0.72% 113.23% NASDAQ: +2.02% 2.58% 2.58% 123.67% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 94.63 1201.07% 5/17/95 1960 Iomega Cor 1.28 8.13 534.56% 10/1/96 42 LucentTech 47.62 86.94 82.58% 8/12/96 130 AT&T 39.58 62.06 56.81% 8/11/95 125 Chevron 50.28 76.13 51.39% 9/9/97 290 Amazon.com 38.22 57.25 49.78% 8/12/96 110 Minn M&M 65.68 84.50 28.66% 8/12/96 280 Gen'l Moto 48.74 59.25 21.56% 1/8/98 425 3Dfx 25.67 27.00 5.19% 1/8/98 115 S&P Depos. 95.91 97.72 1.89% 12/19/97 17 Raytheon 53.21 51.94 -2.39% 8/24/95 130 KLA-Tencor 44.71 37.94 -15.15% 4/30/97 -1170 *Trump* 8.47 9.81 -15.87% 6/26/97 325 Innovex 27.71 21.13 -23.76% 8/13/96 250 3Com Corp. 46.86 31.88 -31.98% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 33591.88 $31010.01 5/17/95 1960 Iomega Cor 2509.60 15925.00 $13415.40 9/9/97 290 Amazon.com 11084.24 16602.50 $5518.26 8/11/95 125 Chevron 6285.61 9515.63 $3230.02 8/12/96 280 Gen'l Moto 13647.92 16590.00 $2942.08 8/12/96 130 AT&T 5145.11 8068.13 $2923.02 8/12/96 110 Minn M&M 7224.44 9295.00 $2070.56 10/1/96 42 LucentTech 1999.88 3651.38 $1651.50 1/8/98 425 3Dfx 10908.63 11475.00 $566.38 1/8/98 115 S&P Depos. 11029.25 11237.66 $208.41 12/19/97 17 Raytheon 904.57 882.94 -$21.63 8/24/95 130 KLA-Tencor 5812.49 4931.88 -$880.62 4/30/97 -1170*Trump* -9908.50 -11480.63 -$1572.13 6/26/97 325 Innovex 9005.62 6865.63 -$2140.00 8/13/96 250 3Com Corp. 11715.99 7968.75 -$3747.24 CASH $10740.46 TOTAL $155861.17