Schizzing Out on The Street
The Gap's example
by David Gardner (DavidG@fool.com)
ALEXANDRIA, VA (Sept. 9, 1998) -- "SCHIZOPHRENIA ON WALL STREET!"
That would be the appropriate headline in newspaper business sections across America tomorrow. The volatility (DOWN, UP, DOWN -- using all caps is appropriate, there) has been a constant, a daily thing, something an investor can now count on as dependably as a prize fighter expects to get jabbed. And of course, accompanying the swoops and dives, is the ongoing changes of opinion that Wall Street pundits and gooroos exhibit.
Case in point, Paine Webber's treatment of Gap Inc. (NYSE: GPS) stock over the past month. On August 25th, Paine Webber downgraded this stock from "Buy" to "Attractive." Hmmmmm. In answer to why, one Fool quipped, "They're hoping a lot of people sell, thus generating commissions, thus driving the price down so they can buy more shares on the cheap. Then they'll issue a buy recommendation so that you'll generate more commissions and push up the stock price, so they can sell at a profit."
Merely cynical? Realistic? YOU MAKE THE CALL.
Pointing out that different brokerage firms sometimes issue differing ratings on the same stocks -- and asking what's up with that? -- MFJohnnyo wrote Foolishly, "Who do you believe? Who do you believe? You believe YOURSELF. You do the research, pick stocks that have strong fundamentals (like GPS), and hold onto them through all the analysts' recommendations (both up and down) UNTIL the fundamentals of the company cause you to look for better investments. Simple, huh?"
Y'know, it really is that simple.
Which is what made the following confusing move that much more amusing: On September 4, as BrianMay documented, "... a mere [10 days] after Paine Webber downgraded Gap from 'buy' to 'attractive,' they have upgraded it from 'attractive' to 'buy!' This is almost unbelievable. I mean really, is this brokerage house really selling advice or generating commissions?"
We'll preserve that in its interrogative form, and allow the Foolish reader to answer it for herself. Anyway, this is all deja vu. Go back and reread pp. 251-2 of our latest book, You Have More Than You Think. Interestingly enough, though the brokerage firm is NatWest, the stock generating almost the exact same schizophrenia happens to be, once again, The Gap.
Now, I don't know how often you change your opinion about The Gap, but I'm guessing it's a darn sight less frequent than the ever fickle Wall Street crowd. But then again, your goal is not to generate commissions, to root for high trading volume on the New York Stock Exchange (703 million shares today, 1.2 billion that bad day last week -- an all-time record). Your goal is to maximize your own investment gains over the long term. The distinction is fundamental and profound. Your efforts are therefore at direct odds with Wall Street's. Many people don't realize that. They need to. You do.
(The Gap is our focus stock on The Motley Fool Radio Show this weekend, for anyone interested. You can find out more about the show, including the past week's show recap every week, right here. Bookmark it.)
The Fool Portfolio lost 2.82% of its value Wednesday, dropping worse than the already bad S&P 500 (down 1.69%) and Nasdaq (down 2.19%) today. The indices are up 3.5% this year, and the Fool Port is up 23%. It's been a good year so far. It was an even better year when our return was more than twice that, during those heady days (gee, they were only a few weeks ago) when for example Amazon was up near $140.
But it's kinda like Peter Lynch said last week on CNBC (I think it was CNBC). To paraphrase: "Until someone wants to ring a bell at market top, and then ring a bell at market bottom, I'm not going to try to time the stock market." We're that way with the stock market overall, and with our individual stocks in particular. I can't tell you where any of our stocks will be trading tomorrow, next week, or next month. I can't tell you what America Online's earnings for the September quarter will be, or whether 3Dfx's Banshee chip will be in everybody's computer next year. What I can do is find the most compelling investments as I see them, buy and hold them, and watch their businesses. I'll sell when I think (a) something has fundamentally changed my initial reason for investing in that company and (b) in addition to (a), the stock seems not unduly underpriced. (Otherwise, we wait for what we consider a "fairer price.")
We advocate this method of investing, while mentioning at the same time that it is not the only way to invest. It is the Foolish way to invest, and in addition to its market-beating historical returns, we can affirm that it will not lead to the schizophrenia that characterizes short-term investors and Wall Street brokerage firms.
We don't get too excited when things are up, and we don't get too disappointed when things are down. That's the Motley Fool way.
One last mention is the debut of FoolU.com. For anyone who is a student, or knows a student, it is the way to begin getting started investing Foolishly. Flick the URL across the Internet to your favorite students: www.foolu.com.
-- David Gardner, September 9, 1998
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Day Month Year History Annualized FOOL -2.82% 6.77% 22.91% 312.48% 41.34% S&P: -1.69% 5.08% 3.69% 119.50% 21.16% NASDAQ: -2.19% 8.36% 3.45% 125.58% 21.97% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 94.25 2491.82% 9/9/97 580 Amazon.com 19.11 84.50 342.16% 10/1/96 84 LucentTech 23.81 77.88 227.09% 5/17/95 1960 Iomega Cor 1.28 3.56 178.23% 4/30/97 -1170*Trump* 8.47 4.50 46.86% 8/12/96 130 AT&T 39.58 55.75 40.86% 2/20/98 200 Exxon 64.09 68.75 7.27% 2/20/98 215 DuPont 59.83 58.19 -2.75% 2/20/98 270 Int'l Pape 47.69 42.25 -11.41% 7/2/98 235 Starbucks 55.91 32.88 -41.20% 8/13/96 250 3Com Corp. 46.86 25.38 -45.85% 8/24/95 130 KLA-Tencor 44.71 22.88 -48.84% 1/8/98 425 3Dfx 25.67 11.00 -57.14% 6/26/97 325 Innovex 27.71 10.50 -62.11% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 66917.50 $64335.63 9/9/97 580 Amazon.com 11084.24 49010.00 $37925.76 4/30/97 -1170*Trump* -9908.50 -5265.00 $4643.50 10/1/96 84 LucentTech 1999.88 6541.50 $4541.62 5/17/95 1960 Iomega Cor 2509.60 6982.50 $4472.90 8/12/96 130 AT&T 5145.11 7247.50 $2102.39 2/20/98 200 Exxon 12818.00 13750.00 $932.00 2/20/98 215 DuPont 12864.25 12510.31 -$353.94 2/20/98 270 Int'l Pape 12876.75 11407.50 -$1469.25 8/24/95 130 KLA-Tencor 5812.49 2973.75 -$2838.74 8/13/96 250 3Com Corp. 11715.99 6343.75 -$5372.24 7/2/98 235 Starbucks 13138.63 7725.63 -$5413.00 6/26/97 325 Innovex 9005.62 3412.50 -$5593.12 1/8/98 425 3Dfx 10908.63 4675.00 -$6233.63 CASH $12005.75 TOTAL $206238.19