Uncle Sam Wins
Thursday, April 23, 1998
by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (April 23, 1998) -- The Fool Portfolio dropped a quick two-and-a-half percent of its value today -- today, Shakespeare's birthday, in fact! -- brought down primarily by its growth component. The last two days have been brutal, as we've lost 4.5% with the market overall pretty much standing pat. Geez, Amazon's lost 12 bucks, 3Dfx has lost 5 bucks, AOL's lost four... there's been little to root for.

And yet, which three stocks do I like more in our portfolio? Which businesses are our most dynamic growers?

I never mind when my darlings get mud splashed on their faces over a few days, a week, or a month; they can always wash the mud off. I mean, those are the stocks about which I'm most confident. I therefore call it "profit-taking," which seems fair enough given that they generally have made lots of profits.

It's when stocks you own that you're not so happy about -- like ATC Communications last year, or 3Com over the life of our investment -- it's when these stocks get whacked that I get worried. Because when a company whose fortunes are declining gets its stock whacked badly, that's usually not "profit-taking." (Many shareholders won't have any profits in those.) That may signal a sellout of a more permanent variety... a stock market whose interest in the company may not return anytime soon.

We're all so spoiled right now by the stock market's amazing fortune that even a 4.5% decline may sicken us, or seem unfair. But the truth is that things can, and sometimes do, get much much worse than that. How does a Fool react? A Fool straps in, hunkers down, smells the flowers, and waits. We ain't playin' no three-day or three-month or three-year game, here. We're playing for a lifetime.

I've been thinking recently about our market's valuation. There's simply no question that stocks have been helped out tremendously by low interest rates. Investors have an option with their cash: invest in non-interest-bearing things like equities, or in interest-bearing things like bonds or T-bills. Whenever interest rates go low, how do investors react? They of course move their money from stuff that bears interest to stuff that doesn't; the stock market goes up. When interest rates rise, the reverse happens: investors want to earn that "safe" -- and now higher -- interest, so they sell some of their stocks to get it, and the market reacts accordingly.

But other factors are at play, and this is really the rub of tonight's report. I really believe that the United States is in an amazing competitive position in world business going forward, and I believe our market has grown (tallying its three-and-a-half greatest years ever) partly for that reason. Let me explain.

The U.S. is first of all the top dog technologically. Whether you talk about our national defense and weaponry, or you talk about American juggernauts Intel and Microsoft arranging and guiding the computer world, or you talk about the growth of the Internet here, I think this point is beyond dispute. Case in point really is the Internet: more than any other country, we are building it, we are developing for it, and we are using it. The future of global technology is at present largely brought to you by the U. S. of A.

Second, the U.S. is also first in its ability to market. We are mass-exporting American culture to all parts of the world with more success than any other country. I think this is beyond dispute again, though I'm always open to any contrary argument. When I go abroad, I see more than one McDonald's in Paris, I see Coca-Cola billboards in Jamaica, I flip on the TV and see American movie reruns in Syria (some really old ones, in fact), and I see Dallas Cowboy t-shirts in the South Pacific. When I was in Pakistan some years ago, many of the people I talked to were just dying to live in the United States. This isn't chauvinism speaking, it's the reality out there. Lots of it comes down to standard of living, our high standard of living combined with an openness to outside cultures which has always been one of American society's greatest strengths. To sum up, Uncle Sam is a marketing machine.

Third and final, the U.S. is known throughout the world for its customer service. Go to many boutiques in Europe and they couldn't care less that you're there; go to one in an American city near you and it's often hard to escape from somebody asking, "May I help you?" (And yes, I do find this annoying lots of the time, but there it is.) Buy something, and in many U.S. stores you can return it within a few weeks for free exchange. Our "have a nice day" culture, which is such a target of cynics (and I do occasionally include myself in this camp), is nevertheless all about placing the customer first, and making sure she's happy about her experience. This is in radical opposition to the approach taken by retailers in much of the rest of the world.

Now, combine technological superiority with marketing ability and an almost fanatical emphasis on customer service and you have a great blueprint for business success in the 21st century. This, as much as our low interest rates and low-inflation environment, has helped our stock market over the past few years. And I believe it will be an active factor over the next few decades, as well.

One need look no further than China, I think, to see that as much as the Internet helps us, it hurts some other very large entities (to our eventual benefit).

I've just named you head of China's "Technology Ministry" (let's just call it that), and you have a tough decision to make: do you acknowledge and facilitate use of the Internet, or do you ignore it? If you acknowledge and facilitate it, you will give your average Chinese a keen sense of the world outside China. That person will come to see how low is his own standard of living, he will be able to speak openly (via e-mail and message boards) with people for whom true freedom is an automatic aspect of their daily experience, he will come to admire -- perhaps even fall in love with -- capitalism. The Internet will function for China as CNN did for the Soviet Eastern bloc. And the proverbial walls will come tumbling down.

Given that the present Chinese government used tanks to run over a young cry for democracy less than 10 years ago, this would be a radical change to say the least.

OK, now pretend you the Technology Minister decide not to acknowledge the Internet... you effectively restrict access to it (largely the case at present, as I understand it).

The world has enjoyed amazing productivity gains thanks to computers, and countries embracing the Internet are using computers to increase communication while concomitantly reducing communication cost. Indeed, computers hooked up to the Internet are reducing the traditional costs of doing business in almost every corporate department. The use of this technology -- particularly, the use of the Internet -- will put the participating countries far beyond those that don't. If China ignores the Internet, it will succumb to revolution.

Either way, I believe that within the next five years, China's present government and economy will vanish or change in much the same way that 1989 changed the face of Eastern Europe.

Either way.

Five years may be too long, in fact.

These are only my opinions, and I'm just a Fool. But I suspect that part of the valuation of our stock market today takes this potentially huge change partially into account. Because tell me this: Who's going to step in as the business beneficiary when China reconstructs?

Yep, those same Uncle Sam companies you see in most of the other countries of the world.

Fool on.

-- David Gardner, April 23, 1998

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -6 3/8 80.88 AOL -1 1/2 71.25 T -1 9/16 61.69 DD + 3/16 76.13 DJT - 1/16 8.25 XON + 13/16 73.75 INVX - 5/16 26.50 IP - 9/16 53.88 IOM - 1/2 8.38 KLAC - 7/8 42.13 LU -3 5/16 73.13 COMS -1 1/16 34.00 TDFX - 3/4 25.75 SPY -1 1/16 112.00
Day Month Year History FOOL -2.54% 5.26% 18.16% 296.55% S&P: -0.92% 1.62% 15.37% 144.24% NASDAQ: -1.89% 2.49% 19.81% 161.24% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 71.25 1859.34% 5/17/95 1960 Iomega Cor 1.28 8.38 554.09% 10/1/96 84 LucentTech 23.81 73.13 207.14% 9/9/97 290 Amazon.com 38.22 80.88 111.60% 8/12/96 130 AT&T 39.58 61.69 55.86% 2/20/98 215 DuPont 59.83 76.13 27.23% 1/8/98 115 S&P Depos. 95.91 112.00 16.78% 2/20/98 200 Exxon 64.09 73.75 15.07% 2/20/98 270 Int'l Pape 47.69 53.88 12.97% 4/30/97 -1170*Trump* 8.47 8.25 2.58% 1/8/98 425 3Dfx 25.67 25.75 0.32% 6/26/97 325 Innovex 27.71 26.50 -4.37% 8/24/95 130 KLA-Tencor 44.71 42.13 -5.78% 8/13/96 250 3Com Corp. 46.86 34.00 -27.45% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 50587.50 $48005.63 5/17/95 1960 Iomega Cor 2509.60 16415.00 $13905.40 9/9/97 290 Amazon.com 11084.24 23453.75 $12369.51 10/1/96 84 LucentTech 1999.88 6142.50 $4142.62 2/20/98 215 DuPont 12864.25 16366.88 $3502.63 8/12/96 130 AT&T 5145.11 8019.38 $2874.27 2/20/98 200 Exxon 12818.00 14750.00 $1932.00 1/8/98 115 S&P Depos. 11029.25 12880.00 $1850.75 2/20/98 270 Int'l Pape 12876.75 14546.25 $1669.50 4/30/97 -1170*Trump* -9908.50 -9652.50 $256.00 1/8/98 425 3Dfx 10908.63 10943.75 $35.13 8/24/95 130 KLA-Tencor 5812.49 5476.25 -$336.24 6/26/97 325 Innovex 9005.62 8612.50 -$393.12 8/13/96 250 3Com Corp. 11715.99 8500.00 -$3215.99 CASH $11233.54 TOTAL $198274.79

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