Are You an Investor?
Friday, June 12, 1998
by Jeff Fischer

ALEXANDRIA, VA (June 12, 1998) -- The Fool Portfolio provided a year's return in one week, which, though exciting, isn't what we invest for. Amazon added $1 billion in market value over the past five days, bringing its market cap to $3 billion and pushing the company's valuation beyond what we hoped to see by the year 2001 when we wrote our 1997 buy report. The company was valued at $856 million when the Fool announced its imminent purchase, and we hoped that Amazon would have a market value of $2 billion by the year 2001 -- representing more than a double and a market-beating return.

You can now say that Amazon is ahead of our valuation schedule, but it's also ahead of schedule with its music store. We didn't expect music to be sold until the end of 1998. Now we might hope for both music and videos (and software?) to be sold in earnest before this year slides into the past. Amazon is also ahead of schedule with its sales growth. The previous 1998 estimate of $325 million in revenue is edging closer to $500 million.

Even so, one argument is that we should sell our shares now, take the massive short-term tax bite, and declare victory. However, the Foolish stance is dramatically different. Consider America Online. That stock has outperformed the Fool's expectations ever since it was bought in 1994. As early as 1995, much of the online community was of the opinion that the Fool should sell the shares and capture its "large and obviously hype-resultant" profit. If AOL had been sold at any particular time over the past four years, though, what would have been bought in its place? Certainly nothing that would have outperformed AOL from the date of its sale. Now we've reached a point where even if the stock drifts for the next five years, we'll cumulatively crush the market with the investment over the nine year period beginning in 1994, and we'll still own AOL in 2003 when it propels higher yet again.

That's real life investing. This parabolic market is not the norm. Often you must wait for years before your confidence is rewarded. This is why investing in individual stocks can be so difficult, and it is why most mutual funds and individual investors underperform the market. They sell companies that, underneath, they truly believe have tremendous futures. They sell during moments of doubt, or during moments when they can't foresee an even better valuation five years later, not to mention the years beyond that. So they sell. I always wonder where you put your money, though, after you've sold your favorite companies (or even your favorite mutual fund).

During Peter Lynch's thirteen-year stretch managing Fidelity Magellan, his fund returned an astounding 29% annually. You probably won't believe the following, though. Mr. Lynch shares that most of the owners of the fund during his reign actually lost money. They sold when the fund was temporarily limping after buying it while it was soaring. Too many people never realize this simple truth:

It's only time that makes you an investor.

If you've owned a dozen stocks over the past five years, but none of them for longer than two or three years, you don't qualify as an investor. You're a speculator. On that argument, we've yet to even become investors in Amazon. We will be, though. Give us a few more years. We intend to be investors in companies that we believe in most -- such as America Online. Our "pre-investment" life with Amazon is simply off to a better start than we'd hoped.

Now Amazon's stock can be flat or fall 50% over the next three years and the Fool Port will still likely beat the market with it since its purchase. So just because the stock (and the business) have outperformed in the short term doesn't mean that we suddenly want to cut our ties with its long-term potential. We now have some measure of comfort with the position. Selling it and paying taxes on it would put us... where? If selling your winners or your more richly valued stocks is the way to beat the market, somebody better tell Warren Buffett that he should have sold Coca-Cola years ago, rather than letting it grow (and grow) to become, at times, 50% of his wealth.

There are a finite number of great companies in which you can invest. Warren Buffett espouses the belief that you sell a stock when you find something better to buy (this is what Fools believe as well). So please point out two companies in the online and Internet business that currently have more potential than America Online and Amazon (Yahoo might qualify), and we'll consider them over our current holdings. Otherwise we won't be selling. We want to be invested in the long-term potential of the Internet. Being diversified shareholders, we'd be idiots not to trust some money to this new and promising industry. So we've bought the companies that we like most. If we hold the stocks long enough, we'll become true investors in a new business, a new paradigm, even a potentially new economy in and of itself. With AOL and Amazon, we think that we stand to gain tremendously over the next decade and longer. That's Foolishness personified. There's no short term in it.

Outside of the Internet industry, perhaps we can find better than the following investments:

KLA-Tencor (Nasdaq: KLAC) declined on Friday following a downgrade from Morgan Stanley Dean Witter to "Outperform" from "Strong Buy." The stock needs to provide some real fireworks if it's going to outperform from, say, November 1997 to November 1999, even. From here forward, though, perhaps it can outperform. This analyst thinks so. But he also thought that it was a strong buy over the past months, too. KLA reports earnings this month and they're expected to decline from last year. At $25 per share, the stock trades at 13 times 1998 earnings estimates.

If Innovex (Nasdaq: INVX) was a comedian, this week it was yanked off the stage with the proverbial hook. The stock declined about 20% the past five days, most of it on Thursday after CEO Thomas Haley was interviewed on CNBC. With typical candor, Mr. Haley said that "business was crummy" and that the next few quarters will likely be weak. The greatest admission, though, was the fact that some earlier adopter drive makers have begun to use a new technology the likes of which Innovex was slightly behind in addressing. Innovex does believe, though, that its new flex circuit solution will win the long-term game because it is much more price competitive -- and cost is key in the drive business. The argument holds merit. A transcript of the interview is available on the Web.

In this realm, we spoke with Innovex's CFO this week and he indicated that companies other than Seagate are now testing Innovex's new technology for adaptation. Other than that, earnings this quarter (the company is actually one of the few drive-related companies to have strong profit margins even during this downturn) should be flat with last quarter, around $0.28 per share. The stock trades at 11 times a likely $1.25 in earnings per share for the year ending September. Enjoy the present, but -- investment-wise with Innovex and others -- here's looking to 1999 and beyond.

Have a Foolish weekend!

--Jeff Fischer

[Related message boards: | America Online | KLA-Tencor | Innovex ]

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Stock Change Bid ---------------- AMZN -1 1/2 60.94 AOL --- 87.00 T + 15/16 62.94 DD - 7/16 74.75 DJT - 3/16 8.38 XON +1 1/4 69.31 INVX + 3/8 14.50 IP + 1/8 44.94 IOM - 3/16 6.50 KLAC -2 5/16 24.81 LU + 1/4 73.38 COMS -1 24.00 TDFX - 1/16 22.31 SPY +1 110.41
Day Month Year History FOOL -0.50% 5.65% 21.72% 308.49% S&P: +0.39% 0.74% 13.23% 139.71% NASDAQ: -0.28% -1.91% 11.12% 142.29% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 87.00 2292.45% 5/17/95 1960 Iomega Cor 1.28 6.50 407.65% 9/9/97 580 19.11 60.94 218.86% 10/1/96 84 LucentTech 23.81 73.38 208.19% 8/12/96 130 AT&T 39.58 62.94 59.02% 2/20/98 215 DuPont 59.83 74.75 24.93% 1/8/98 115 S&P Depos. 95.91 110.41 15.12% 2/20/98 200 Exxon 64.09 69.31 8.15% 4/30/97 -1170*Trump* 8.47 8.38 1.11% 2/20/98 270 Int'l Pape 47.69 44.94 -5.77% 1/8/98 425 3Dfx 25.67 22.31 -13.07% 8/24/95 130 KLA-Tencor 44.71 24.81 -44.51% 6/26/97 325 Innovex 27.71 14.50 -47.67% 8/13/96 250 3Com Corp. 46.86 24.00 -48.79% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 61770.00 $59188.13 9/9/97 580 11084.24 35343.75 $24259.51 5/17/95 1960 Iomega Cor 2509.60 12740.00 $10230.40 10/1/96 84 LucentTech 1999.88 6163.50 $4163.62 2/20/98 215 DuPont 12864.25 16071.25 $3207.00 8/12/96 130 AT&T 5145.11 8181.88 $3036.77 1/8/98 115 S&P Depos. 11029.25 12696.72 $1667.47 2/20/98 200 Exxon 12818.00 13862.50 $1044.50 4/30/97 -1170*Trump* -9908.50 -9798.75 $109.75 2/20/98 270 Int'l Pape 12876.75 12133.13 -$743.63 1/8/98 425 3Dfx 10908.63 9482.81 -$1425.81 8/24/95 130 KLA-Tencor 5812.49 3225.63 -$2586.87 6/26/97 325 Innovex 9005.62 4712.50 -$4293.12 8/13/96 250 3Com Corp. 11715.99 6000.00 -$5715.99 CASH $11662.57 TOTAL $204247.48

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