ALEXANDRIA, VA (May 26, 1998) -- Following Asian markets lower, the U.S. stock market fell sharply, dropping 1.5%. The Fool fell with it. In fact, the Fool Port (codename: Volatile Turtle) managed to almost double the market's loss, losing 2.8%. Only AT&T (NYSE: T) managed to rise for us.
Glancing at our list of stock price movements for the day and seeing Amazon down $4, AOL down $2, and 3Dfx down over $2, certain images might arise, including:
--heaps and piles of burning books.
--Roman ruins from a community long
since lost, standing silent in the sun.
--Japanese war planes diving into aircraft
carriers on a blue sea (with 3D gunfire).
--David Gardner at home eating dinner
unawares and not concerned.
The Fool Port is volatile, but it's a turtle. We're riding it for the years to come. International markets have caused much larger problems in the past than these current financial troubles (wars come to mind), and getting anxious about a falling stock market in the near term is far from our gig. A Fool makes millions by holding onto winning companies for decades. This portfolio will be worth over one million dollars in sixteen years if it grows 11% annually (the market's historical average) beginning now.
To accomplish this, we need to give most of our attention to the companies that we own, rather than the market as a whole. If our companies aren't likely to beat the S&P 500 over the long term, we need to sell them and move the money into the S&P 500 itself or into something that we think can actually beat it. Sure, Amazon's (Nasdaq: AMZN) four dollar loss today looks large, but it's only a 4.8% decline. Much more substantial is the 10.9% decline in 3Dfx (Nasdaq: TDFX), and almost as bad as Amazon's loss is the 4.3% shed by Innovex (Nasdaq: INVX).
But what is most worthy of our attention is the fact that Innovex, 3Com (Nasdaq: COMS) and KLA-Tencor (Nasdaq: KLAC) are all at or very near new 52-week lows. In a market that has risen more than 30% over the trailing 12 months, these three stocks have all lost ground and are now doing a Tibetan Death Dance. Are there only temporary, specific problems at these companies? How temporary? KLA-Tencor hasn't moved since 1995. Innovex has quickly fallen since April and is close to its historical low valuation, at 7.5 times earnings estimates five quarters out.
This type of valuation -- as with KLA-Tencor and perhaps even with 3Com at this point -- is likely to make a person hesitate before selling, if they sell at all. These stocks could easily outperform the market over the next year or two rising from these low points. But even so, will they outperform over the next five or ten years? That's the harder question to ask and to answer. Can you find something that you think will outperform these companies over very long periods of time (regardless of what happens in the next two years), thus making your investment life easier and more rewarding, too?
That's what we're aiming for eventually, until at some point this portfolio will trade even less frequently than it already does. Essentially, investing for us will mean buying and holding companies that we can't ever foresee selling. Sure, there will be the small caps that come and go (hopefully for good profit), and there will be the shorts, but the bulk of the portfolio will be comprised of (as it is now) a few world leaders that will continue to become more and more of the portfolio's worth.
Consider that the same great companies to emerge during the Industrial Revolution and then during the Post World War II era have, by most regards, continued to lead. You don't see behemoths changing leads -- swapping in and out of favor with the general marketplace or with the consumer. You see new leaders develop, but the old guard is still the old guard. That's why the Nifty 50 companies from the 1970s (even from the "high" stock valuations granted then) have still topped the market's performance.
The leaders walk in line and continue to lead the pack. Our Three Stooges (as I'll now call them) have veered away from the leaders' path over the past year and have fallen in line -- KLA-Tencor, 3Com, and Innovex, all three having edged toward new lows. Two are in industries that are seen as cyclical and are granted low valuation multiples. Are they bad stocks? Well, both stocks have outperformed the market in the past five years, but over the next ten years will they? KLA is batting 0 for 3 for the past three years.
Then there's 3Dfx, the Fool's latest addition. Our message board believes that the stock fell today because 3DLabs (Nasdaq: TDDDF) announced that it anticipated poor results for the next few quarters. This former highflier was $50 a share in the past year, but today it fell 23% to $7. Is it fair that 3Dfx fell with 3DLabs, if indeed it did? No, not by any argument. 3Dfx is enjoying its own bull market in its gaming niche -- this is obvious from its past three quarters of sales growth and its earnings explosion. What 3DLabs does really has no effect on 3Dfx and its sales.
3Dfx now trades at 9.7 times the 1999 earnings estimate.
Check out our new Fool message boards. They're much quicker than the last version, and the Department of Justice isn't investigating their launch whatsoever. In our next version we might try to bundle a special Fool Web browser with them.
Have a Foolish evening...
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Day Month Year History FOOL -2.80% -5.13% 15.31% 286.97% S&P: -1.48% -1.60% 12.74% 138.66% NASDAQ: -1.49% -4.83% 13.23% 146.90% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 82.63 2172.14% 5/17/95 1960 Iomega Cor 1.28 6.75 427.18% 10/1/96 84 LucentTech 23.81 70.13 194.54% 9/9/97 290 Amazon.com 38.22 81.88 114.21% 8/12/96 130 AT&T 39.58 59.63 50.65% 2/20/98 215 DuPont 59.83 79.50 32.87% 1/8/98 115 S&P Depos. 95.91 109.41 14.08% 2/20/98 200 Exxon 64.09 69.63 8.64% 2/20/98 270 Int'l Pape 47.69 49.69 4.18% 4/30/97 -1170*Trump* 8.47 8.63 -1.84% 8/24/95 130 KLA-Tencor 44.71 35.00 -21.72% 1/8/98 425 3Dfx 25.67 19.31 -24.76% 6/26/97 325 Innovex 27.71 19.13 -30.98% 8/13/96 250 3Com Corp. 46.86 27.00 -42.39% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 58663.75 $56081.88 9/9/97 290 Amazon.com 11084.24 23743.75 $12659.51 5/17/95 1960 Iomega Cor 2509.60 13230.00 $10720.40 2/20/98 215 DuPont 12864.25 17092.50 $4228.25 10/1/96 84 LucentTech 1999.88 5890.50 $3890.62 8/12/96 130 AT&T 5145.11 7751.25 $2606.14 1/8/98 115 S&P Depos. 11029.25 12581.72 $1552.47 2/20/98 200 Exxon 12818.00 13925.00 $1107.00 2/20/98 270 Int'l Pape 12876.75 13415.63 $538.88 4/30/97 -1170*Trump* -9908.50 -10091.25 -$182.75 8/24/95 130 KLA-Tencor 5812.49 4550.00 -$1262.49 1/8/98 425 3Dfx 10908.63 8207.81 -$2700.81 6/26/97 325 Innovex 9005.62 6215.63 -$2790.00 8/13/96 250 3Com Corp. 11715.99 6750.00 -$4965.99 CASH $11558.06 TOTAL $193484.34