Fool Portfolio Report
Tuesday, February 17, 1998
by Jeff Fischer (JeffF@Fool.com)

CHICAGO, IL (Feb. 17, 1998) -- In 1936, deep in the throes of the Great Depression, Franklin Roosevelt said, "There is a mysterious cycle in human events. To some generations much is given. Of other generations, much is expected."

How true his words would become for his generation wouldn't be known for another two decades, after World War Two took the lives of tens of thousands and after the Cold War placed the United States in a constant search for security. For investors, the stock market didn't return to its 1929 peak until 1954, twenty-five years later. For nearly three decades there was zero capital appreciation on the stock market.

Roosevelt's thoughts about "cycles" are accurate by more than a few measures, and not only symbolically. Economists would argue -- even Foolish economists -- that cycles dictate nearly everything in business. Momentum builds in one direction for years until it finally slows and another "cycle" of economic growth (or lack of it) takes hold, swinging the pendulum in the opposite direction. Stocks follow the cycles that are inflation, earnings growth, interest rates, and world events -- all of which intertwine.

The current cycle began with high interest rates and high inflation in the seventies, and over the years those numbers have sunk to become the lowest inflation and interest rates that America has seen in decades. At the same time, democracy has emerged around the world, the U.S. has won the Cold War, and for the past fifteen years the U.S. stock market has been rising. The popularity of stocks -- as seen by all the new investment books, most frequented Web sites, television shows, etc. -- might very well be at an all-time high. In fact, more Americans than ever own equities.

Compared to the Great Depression, our times right now might be called the Great Regression. How so? This might be a Great Regression to the common thought that is: Everyone should just buy and hold stocks. "Buy and hold" has become the overwhelming mantra. Yes, this approach is best if you have ten years or longer and if you know how to choose the right companies, but to hear the phrase so frequently repeated in the media -- "Just buy and hold!" said with a confident smile -- makes a person wonder how much longer the market can keep rising in the near term. But not for reasons that you might think.

Last week a friend in the office said, "Will it all end badly?" The question was asked because over the past three years nearly every stock that he bought simply rose. And kept rising. It couldn't be natural -- or right. We agreed in the end that it wouldn't all end badly, but that it certainly couldn't continue like this indefinitely. Over the coming decades there will be down years, of course, and maybe even a very bad five- or ten-year period.

But no, the market won't perform horribly simply because it has performed so well for the past fifteen years. The market has no memory and no idea how it has performed, nor does that matter. Stocks move with the economy and on earnings growth. If both continue to be favorable for an eternity, the market would very gladly continue to grow indefinitely, for an eternity. There is no seesaw to correct -- "Oh, we've been up in the air for so long, we need to come down." No.

But there are cycles. Economies expand for decades and then finally slow or contract for a time. And stocks go with them. There are cycles that affect entire generations. The cycles are larger than anyone could manage or ever predict, and they usually happen for the least suspected of reasons. (After World War One, the last thing that people expected in the coming decade was the start of the Great Depression.)

What do Fools do about this? There's not much to do -- you can't live in fear of a coming economic slowdown, one that might not even arrive in your lifetime -- but don't invest with great expectations for five years from now, or even ten years. Since 1950 the average bear market has lasted eight months and lowered the market by 28%, but more important is how long it then took for stocks to recover. Just two decades ago, it took nearly ten years for stocks to reach a previous high mark. After all, the typical economic cycle (up or down) lasts for at least seven years. (This is part of the reason that the Drip Port, with a 20-year goal, is aiming to be especially diligent with the buy decisions that it locks into.)

Invest with the expectation that two decades from now, or ideally in three decades (not just five years), you will be much better off monetarily than you are now, no matter at what level you're starting from. Invest and enjoy the long, slow, life-long process. And if you don't want to invest all of your life savings in the market right now, all at once, then don't. Invest in whatever way makes you most comfortable.

I talked to people this weekend in Chicago who actually felt guilty for not having their money in the market. They felt guilty -- "I'm missing everything" -- and they now feel rushed to begin investing. That type of thinking is not Foolish. As the book You Have More Than You Think reminds, you have more time than you think, and you should use it to become a knowledgeable Fool, not rush forward like a fool.

Though Presidents' Day isn't in honor of FDR, or in honor of entire American generations from this century, it certainly could be. The decades of hardship that others went through, and that eventually led to the world as it is now, always merits reflection. FDR's statement about cycles and giving and receiving has Foolishness written all over it.

Today the Fool Port gave, declining despite gains in Iomega, 3Dfx, Innovex, and Spiders. The Fool lost to the S&P due primarily to declines in America Online and KLA-Tencor, despite news from both companies.

Fresh from reporting earnings, America Online (NYSE: AOL) continued to plow forward by announcing new business. Mirroring the agreements that AOL has signed with other vendors and partners, the company signed an agreement with Intuit (Nasdaq: INTU) that demands an up-front payment followed by future payments, as well as a shared cut of revenues after a certain point. Intuit will become the primary personal finance content provider on the AOL.COM website, and will also become a key content provider on America Online's proprietary service, appearing on the Personal Finance channel.

Intuit will pay $16 million up-front and $14 million over the coming three years for a highly visible home at the leading online service. (AOL has made a practice of collecting large up-front payments in relation to the total amount being paid in any contract.) Today America Online also announced an agreement with E!, of Entertainment Television. E! Online will be available on AOL's Entertainment channel, and at keyword: E!. No terms of any Mon-E! payments were given for this deal.

KLA-Tencor (Nasdaq: KLAC) announced a software agreement with Avant! (What's with this stuff? Should the Fool have been called The Motley Fool!). Avant! and KLA-Tencor are going to develop inspection software for KLA's semiconductor equipment biz. Meantime, KLA and other industry players are benefiting from the move to 0.25 micron technology from 0.35 micron. The smaller size means that more chips can fit onto a wafer, decreasing the cost per chip produced. There's more on this in relation to Intel (Nasdaq: INTC) in today's Drip Port column.

Finally, as Paul Larson wrote on Friday, this week will be the third -- yes, only the third -- historical switch of our Foolish Four stocks. The trade announcement will be made on Thursday after the market closes and the trades should be done on Friday.

Have a Foolish evening...

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -1 61.25 AOL -2 1/8 112.00 T + 1/2 63.75 CHV - 7/16 77.56 DJT - 3/16 10.63 GM +1 3/8 64.81 INVX + 3/8 24.50 IOM + 1/8 9.19 KLAC -1 3/16 43.69 LU -1 9/16 92.56 MMM --- 88.13 RTN.A - 1/4 53.00 COMS -1 1/4 33.38 TDFX + 5/16 23.56 SPY + 1/2 102.50
Day Month Year History FOOL -0.24% 6.77% 0.57% 237.52% S&P: +0.26% 4.33% 5.39% 123.12% NASDAQ: -0.41% 5.19% 8.48% 136.53% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 112.00 1439.97% 5/17/95 1960 Iomega Cor 1.28 9.19 617.54% 10/1/96 42 LucentTech 47.62 92.56 94.39% 8/12/96 130 AT&T 39.58 63.75 61.08% 9/9/97 290 Amazon.com 38.22 61.25 60.25% 8/11/95 125 Chevron 50.28 77.56 54.25% 8/12/96 110 Minn M&M 65.68 88.13 34.18% 8/12/96 280 Gen'l Moto 48.74 64.81 32.97% 1/8/98 115 S&P Depos. 95.91 102.50 6.87% 12/19/97 17 Raytheon 53.21 53.00 -0.39% 8/24/95 130 KLA-Tencor 44.71 43.69 -2.29% 1/8/98 425 3Dfx 25.67 23.56 -8.20% 6/26/97 325 Innovex 27.71 24.50 -11.58% 4/30/97 -1170 *Trump* 8.47 10.63 -25.46% 8/13/96 250 3Com Corp. 46.86 33.38 -28.78% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 39760.00 $37178.13 5/17/95 1960 Iomega Cor 2509.60 18007.50 $15497.90 9/9/97 290 Amazon.com 11084.24 17762.50 $6678.26 8/12/96 280 Gen'l Moto 13647.92 18147.50 $4499.58 8/11/95 125 Chevron 6285.61 9695.31 $3409.70 8/12/96 130 AT&T 5145.11 8287.50 $3142.39 8/12/96 110 Minn M&M 7224.44 9693.75 $2469.31 10/1/96 42 LucentTech 1999.88 3887.63 $1887.75 1/8/98 115 S&P Depos. 11029.25 11787.50 $758.25 12/19/97 17 Raytheon 904.57 901.00 -$3.57 8/24/95 130 KLA-Tencor 5812.49 5679.38 -$133.12 1/8/98 425 3Dfx 10908.63 10014.06 -$894.56 6/26/97 325 Innovex 9005.62 7962.50 -$1043.12 4/30/97 -1170*Trump* -9908.50 -12431.25 -$2522.75 8/13/96 250 3Com Corp. 11715.99 8343.75 -$3372.24 CASH $11259.61 TOTAL $168758.24