ALEXANDRIA, VA (Jan. 30, 1998) -- Hi again, everyone, TMF Bogey here to peek at the Fool port with you. Last time I was here we had a great ol' discussion about averaging down. Hopefully we can have as much fun this time around. First things first though, what a busy week for the Hall of Portfolios! Here are a few of the highlights for your weekend reading:
3Dfx reports earnings -- David Gardner
recaps and looks ahead.
New Estimates for 3Dfx -- David looks at analyst revisions for our newest stock.
Cash-King's Launch! -- Tom launches our newest and long-awaited portfolio with a buy of Microsoft.
The Drip Portfolio announces a new buy -- After three months of analyzing over twenty food companies, tonight Jeff's report announces the Drip Port's latest and third addition.
So, what else is going on? Let's recap today's news quickly and then have some fun :)
The portfolio was up slightly today, beating the S&P which fell 0.53%. America Online (NYSE: AOL) was up $11/16 to $95 5/8 after announcing that the CompuServe deal was approved by CompuServe shareholders and also that it may be laying off 300 CompuServe employees.
The only other news on a Fool Port stock was an announcement that the Chicago Board Options Exchange (CBOE) will be listing options of 3Dfx (Nasdaq: TDFX) starting Friday, February 6th. This is a non-event for Fools as we don't buy options, but we thought you might like to know in case you heard about it and wondered what was going on. For more on options and all the risks associated with them, check out the CBOE website.
Now, as I mentioned above, the last time I was here I got into a rigorous e-mail debate with Fools about the merit or lack of merit to averaging down. Today, I'd like to talk about something that I think about all the time, but that most people don't talk about too much. I'm referring to the idea of "risk vs. reward." People generally frown at the "cloudy" concept of risk, so I thought I'd try and shed some light.
Everyone knows that it's a dumb idea to step out onto the highway and try and cross the road? Why, because the risk associated with making it across to the other side isn't worth the reward associated with getting there. It isn't worth it, you'll probably get killed!
Similarly, you need to apply the same sort of logic to your investments as you do to crossing the highway. The problem is that investment risks aren't nearly as obvious as cars traveling 75 MPH! Trying to move from the abstract to the concrete, let's use an example of a stock from history.
I always like to point to the example of Merck (NYSE: MRK) back in 1992 and 1993. Merck, the giant drug company, was reeling in the face of the Clinton healthcare reform plan. All healthcare stocks were beaten up because nobody knew what was going to happen with legislation and everyone was afraid that Clinton's proposals would cripple the drug companies. That was the perception, the fear, the unrealized situation. At the end of 1993, Merck had fallen from the $60s and was trading at just $34 3/8.
The reality was quite different. Merck had consistently grown revenues year over year and established itself as one of the premiere drug makers in the world. 1994 revenue growth was almost 50% and the Clinton legislation never went through. The fears were unfounded and the stock price for this fine, fine company, was artificially low. From Jan 1, 1994 to Jan 1, 1998, the stock is up almost 235% with an annualized return of 35%.
Now, I know what you're thinking. Sure, Bogey, in hindsight everything is so clear, but it wasn't then! Well, it was to me and I'm not that smart. Here's how I knew. Merck was the absolute leader in the drug industry. It had fallen in anticipation of something. That's the key.
The fall in the stock price was before the actual event and the beautiful thing was that you KNEW what that event was going to be. What risk was left? Had President Clinton's healthcare reform been enacted, one could argue that the stock had already been cut in half in anticipation of the laws being changed and that it wouldn't fall any more. The total upside was if the laws didn't get passed. Oddly enough, the legislation died.
I suppose in its purest form, this is called "contrarian investing," but I think it can be applied to almost any situation. The challenge is in being able to understand the risks and rewards of any business. It also dictates that you understand the companies you invest in. The best investors in the world really, really understand the companies they own. Do you want to be the best? Are you up for the challenge? If so, join me out on our website in my folder, Bogey's Bungalow, and let's talk about some other stocks that have incredible risk to reward potential. Is Oracle one of those stocks right now? How about 3Com? See ya in the folders!
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Today's FoolWatch: all the latest in Fooldom.
Day Month Year History FOOL +0.07% -5.80% -5.80% 216.12% S&P: -0.53% 1.02% 1.02% 113.85% NASDAQ: -0.01% 3.12% 3.12% 124.85% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 95.63 1214.82% 5/17/95 1960 Iomega Cor 1.28 9.06 607.78% 10/1/96 42 LucentTech 47.62 88.50 85.86% 8/12/96 130 AT&T 39.58 62.63 58.23% 9/9/97 290 Amazon.com 38.22 59.00 54.36% 8/11/95 125 Chevron 50.28 74.75 48.65% 8/12/96 110 Minn M&M 65.68 83.50 27.14% 8/12/96 280 Gen'l Moto 48.74 58.00 18.99% 1/8/98 115 S&P Depos. 95.91 98.31 2.51% 12/19/97 17 Raytheon 53.21 51.13 -3.92% 1/8/98 425 3Dfx 25.67 23.88 -6.98% 4/30/97 -1170 *Trump* 8.47 9.13 -7.75% 8/24/95 130 KLA-Tencor 44.71 37.50 -16.13% 6/26/97 325 Innovex 27.71 21.81 -21.28% 8/13/96 250 3Com Corp. 46.86 33.06 -29.45% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 33946.88 $31365.01 5/17/95 1960 Iomega Cor 2509.60 17762.50 $15252.90 9/9/97 290 Amazon.com 11084.24 17110.00 $6025.76 8/11/95 125 Chevron 6285.61 9343.75 $3058.14 8/12/96 130 AT&T 5145.11 8141.25 $2996.14 8/12/96 280 Gen'l Moto 13647.92 16240.00 $2592.08 8/12/96 110 Minn M&M 7224.44 9185.00 $1960.56 10/1/96 42 LucentTech 1999.88 3717.00 $1717.12 1/8/98 115 S&P Depos. 11029.25 11305.94 $276.69 12/19/97 17 Raytheon 904.57 869.13 -$35.45 1/8/98 425 3Dfx 10908.63 10146.88 -$761.75 4/30/97 -1170*Trump* -9908.50 -10676.25 -$767.75 8/24/95 130 KLA-Tencor 5812.49 4875.00 -$937.49 6/26/97 325 Innovex 9005.62 7089.06 -$1916.56 8/13/96 250 3Com Corp. 11715.99 8265.63 -$3450.37 CASH $10740.46 TOTAL $158062.21