Don't Panic
Keep perspective in good times, too
by Paul Larson ([email protected])
CHICAGO, IL (Sept. 8, 1998) -- The markets were in a panic today, and the Fool Port certainly reaped some of the benefit of this frenzy. Forget about the selling panic we've seen over the past several weeks, today saw traders across the land actually go into a buying panic.
Yes, a buying panic, with the Nasdaq Composite up over 6% and every single Fool Port holding trading higher than a day ago, even Trump Hotels (NYSE: DJT). This translated to a 7.37% rise in the portfolio's value, which is a welcome turn of events given the choppy markets of late.
One only has to look as far as Alan Greenspan's comments about interest rates on Friday night to see why the market was struck with fear of missing the party. If one has any question who exactly the G-Man is, make sure to click here for a very Foolish collection.
In any case, there was a "change of heart" by the Federal Reserve's chairman that essentially indicated that the Federal Reserve is just as likely to lower interest rates as they are to raise them. Rates, in other words, went from probably going up to probably staying the same. Today's dramatic upswing was caused by the slightest hint that rates were going to be stable. Keep in mind that this was just a hint, not an actual raising or lowering of rates. A mere insinuation from Greenspan was all that was needed to kick the markets skyward.
This day marks a good one to quickly show why interest rates are of interest to traders and financiers alike. Lower rates are good for the stock market for a number of reasons. They decrease the attractiveness of other investment options such as bonds. Reduced rates also lessen the cost of borrowing for both consumers and corporations alike, which may stimulate additional economic activity. Furthermore, lower rates increase the net present value of all discounted future corporate earnings. That's financial mumbo-jumbo for essentially saying that inflation isn't going to eat away at the value of future profits.
I doubt I will find much argument with the statement that interest rates are important to the economy as a whole. Nevertheless, we are Fools here, and the future interest rate environment is of little interest to our investment making decisions in part because it is -- like the stock market -- impossible to predict. We might look at the news with near-term interest, but we also try to keep things in perspective.
Let's cut to the chase. America Online (NYSE: AOL) was up over nine bucks today. The stock is going to fly or fail on the wings of the number of members it can attain in the future, not whether or not interest rates may change a quarter point down the road. Amazon.com's (Nasdaq: AMZN) fortunes are dependent on the company growing its business enough to attain profits. Investors in the company need to be concerned about this growth and not concerned whether or not inflation is ticking up or down a few basis points. 3Dfx (Nasdaq: TDFX) is going to succeed if the company can sustain its earnings growth by maintaining its technological lead regardless of who the next Russian prime minister is going to be.
I guess what I'm trying to say here is that there are primary effects and there are secondary effects. Interest rates, economic health and politics surely all have their effects on all companies, but they are secondary effects. Foolish investors service themselves best by looking most closely at primary effects, such as the health of a company's core business, and not placing bets on whimsical guesses as to where rates are going next.
Those who think they can predict interest rates look almost as silly to us as those who think they can predict the market's direction. Let the media and the wise focus on predicting interest rates, we are going to keep our focus where it's always been -- looking at things fundamentally on a company by company basis with the longest viewpoint possible. Keeping perspective is just as important with positive news events as it is with negative news.
Here's a final thought: A rising tide is going to raise all ships, and a sinking tide will sink them, too. The problem is that investors don't get to choose the market's tide, but do get to choose the ships they put their money in. Spending time looking for the most seaworthy ships seems much more productive than trying to guess what the seas are going to do.
On that note, let's look at some of the news that does impact our companies in a meaningful way. 3Dfx announced a number of things today, including an extension of the company's alliance with one of the world's largest video gaming software designers around, Electronic Arts (Nasdaq: ERTS). The company also announced that Diablo II -- a game I'm sure many at Fool HQ will check out in their late-night time away from work -- will be optimized to work best with 3Dfx hardware and software. Alliances and arrangements such as these go a long way towards advancing 3Dfx's goal of building a strong brand in the computer graphics field. Even after today's 16% move north, the company still only trades at a little over 5 times the forward profit estimates of $2.03.
AT&T (NYSE: T) was also in the news over the weekend. On Friday an appeals court ruled that certain key parts of the 1996 Telecommunications Act were in fact constitutional. The laws in question prohibit the regional bell operating companies, such as SBC Communications (NYSE: SBC), from offering long distance and a few other services within their regions until they open their local networks to competitors. Mark up a victory for all current long distance phone companies and a loss for the regional bells.
Even with this one positive ruling for Ma Bell, I'm quite skeptical about the company's future. Make sure to check out last week's Dueling Fools in which David Forrest and I debate the fortunes of this Fool Port holding. Judging from the comments Jeff Fischer made in the Dueling Fools message board over the weekend, I get the distinct impression he's rather skeptical about the company, too.
Regardless, AT&T is being held here in the portfolio as part of the Foolish Four. This means that no matter what we think about the company's prospects we will be keeping the stock in the portfolio until at least August, 1999 when the portfolio does its next re-weighting of the four Dow components.
Don't panic, Fools.
-- Paul Larson
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Day Month Year History Annualized FOOL +7.37% 9.87% 26.48% 324.46% 42.36% S&P: +5.09% 6.89% 5.46% 123.27% 21.68% NASDAQ: +6.02% 10.78% 5.76% 130.62% 22.65% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 95.25 2519.32% 9/9/97 580 Amazon.com 19.11 92.25 382.71% 10/1/96 84 LucentTech 23.81 81.50 242.32% 5/17/95 1960 Iomega Cor 1.28 3.75 192.88% 4/30/97 -1170*Trump* 8.47 4.56 46.13% 8/12/96 130 AT&T 39.58 55.75 40.86% 2/20/98 200 Exxon 64.09 67.38 5.13% 2/20/98 215 DuPont 59.83 57.19 -4.42% 2/20/98 270 Int'l Pape 47.69 42.31 -11.28% 7/2/98 235 Starbucks 55.91 33.25 -40.53% 8/24/95 130 KLA-Tencor 44.71 24.44 -45.34% 8/13/96 250 3Com Corp. 46.86 25.50 -45.59% 1/8/98 425 3Dfx 25.67 11.56 -54.95% 6/26/97 325 Innovex 27.71 10.81 -60.98% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 67627.50 $65045.63 9/9/97 580 Amazon.com 11084.24 53505.00 $42420.76 10/1/96 84 LucentTech 1999.88 6846.00 $4846.12 5/17/95 1960 Iomega Cor 2509.60 7350.00 $4840.40 4/30/97 -1170*Trump* -9908.50 -5338.13 $4570.38 8/12/96 130 AT&T 5145.11 7247.50 $2102.39 2/20/98 200 Exxon 12818.00 13475.00 $657.00 2/20/98 215 DuPont 12864.25 12295.31 -$568.94 2/20/98 270 Int'l Pape 12876.75 11424.38 -$1452.38 8/24/95 130 KLA-Tencor 5812.49 3176.88 -$2635.62 7/2/98 235 Starbucks 13138.63 7813.75 -$5324.88 8/13/96 250 3Com Corp. 11715.99 6375.00 -$5340.99 6/26/97 325 Innovex 9005.62 3514.06 -$5491.56 1/8/98 425 3Dfx 10908.63 4914.06 -$5994.56 CASH $12005.75 TOTAL $212232.06
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