<THE FOOL PORTFOLIO>
Investors vs. Bears
The difference is more than legal

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 12, 1998) -- If you don't own an automobile, you easily find many reasons to dislike them. They're noisy, you must wait for them to cross the street, they pollute the air, and they make our cities and towns ugly in appearance. I know how these feelings develop, because I don't own a car by choice.

If you don't own stocks like America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN), you can find many reasons to dislike them, too. These stocks have gained hundreds of percentage points (without you), it's difficult to understand their valuation, neither has made much money in the past, and the risk level is high. The people owning these stocks are "in for a fall," according to growling bears not enjoying the party.

If you don't own these stocks, the higher they rise, the greater your discontent with them. It's not surprising that the more Amazon rises, the more columnists attack it. They don't own it. What is partially motivating them to attack it?

Consider human nature.

I recently had the opportunity to have a car for two weeks. While "owning" this car, I didn't mind that automobiles make our towns ugly and pollute the air. I also didn't give any heed to the pedestrians on the side of the street waiting to cross as I sped down the road. I enjoyed the convenience and freedom. It was great. However, now that I don't have a car anymore, I'm again dissatisfied by the presence of so many of them.

Likewise, today again baffled and disgruntled many of the journalists and others who don't own America Online and Amazon. The stocks rose yet again. They can't understand it. They don't like it. They might write negatively about it.

But remember that whenever a journalist writes very negative statements about a stock, it's almost a sure bet that he or she doesn't own it. (The Fool Port is the one place I've seen where this isn't true: we've gone out of our way to criticize our own holdings.)

Consider the journalists who have written negatively about America Online, Amazon, and Iomega for years. It was apparent from their writing that they didn't own the stocks. So, 1) They didn't own the stocks, and 2) They were negative on the companies persistently. What has happened since?

Over the past four years for AOL and Iomega, and over the past 19 months for Amazon, these stocks have been three of the very best performing on the stock market. Three of the best. Even following Iomega's decline from its high, it's been an incredibly successful four year investment.

Now, the journalists writing about these stocks don't own them for a reason: When you get right down to it, they don't understand them. They never did. Now imagine how their frustration escalates the more the stocks rise. The more they rise, the more they write negatively about them. Anyone following these journalists misses a great opportunity. And often, bearish journalists finally submit to a stock long after the largest gains are history. Iomega was a case in point.

The stock market has shown that these journalists didn't understand the stocks. They were writing negatively about them over 2,000% ago with AOL, and 600% ago with Iomega and Amazon. That's clearly a case of "misunderstanding" on the part of the bearish journalists.

Taking this discussion one step further: Most people don't understand the reasoning behind investing in America Online and Amazon.com. However, perhaps, as with so many things in life, you need to own them in order to understand them. Once you own something (like myself and the car that I borrowed), you see things differently. You see the possibilities. You begin to think of a further horizon. Of course, you have self-interest involved, too. But so do the founders of these companies.

Non-owners don't have that. They see the pitfalls and the danger. They have a natural interest in seeing these stocks falter because they don't own them. That feeling intensifies the more the stocks rise. The bears don't want to be wrong about their decision.

Fools are served well to remember the psychology that comes with ownership versus non-ownership. If you don't own a car, you typically don't care for cars. They're a nuisance to your walking life. But if you own a car, they're great. One should always question why journalists write scathing negative articles about certain stocks time and again. It's partially -- if not wholly -- because they don't own them. If they owned them, they would see the situation much differently. They would have a different base of knowledge. They might actually study them and analyze them differently. (Of course, we might argue they'd need to be of a different ilk to ever buy them in the first place.)

Like the Emperor with no clothes, the bears typically don't see the flaws in their own bearish arguments because they don't grasp the whole situation they're writing about. If they did, they might have bought the stocks long ago. The judgment of so many journalists was obviously wrong with AOL and Amazon, calling both overvalued when the shares were in single digits. (Even the Wall Street Journal slammed AOL for years.) If you're that wrong to begin with, your subsequent arguments have to be discounted that much more, and your knowledge of these companies and their stocks needs to be questioned.

We all need to remember that every column we read -- including this one -- has one person writing it who has limited knowledge and experience, and who has already made certain decisions in his life (not to buy AOL or Amazon, for example) and who did so for a reason. If the reason is flawed, the arguments are going to be flawed. And typically the more the situation works against him, the more ridiculous his arguments become. (Like Barron's saying AOL's true value was around book value of $6).

With Rule Breaking principles in place, this portfolio will go far to address the reasoning behind owning these stocks and others like them.

We'll be interviewing Mr. Douglas Keller from Innovex (Nasdaq: INVX) next Wednesday. Please post your questions for Innovex on the company's message board. We'll have the Innovex conference call summary available tomorrow, too.

Starbucks (Nasdaq: SBUX) reported fourth quarter earnings of $0.28 per share, in line with estimates. Revenue for the year topped $1.1 billion, and net profit margins rose above 7%. We'll have more on Starbucks soon, too. Given that we hope to own the company 10 years or longer, this is just one quarter of many and not a giant event either way. Starbucks is brewing well. There is ongoing discussion on the Starbucks message board. Check that out!

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Bookmark Live Fool Port Quotes

11/12/98 Close

Stock Change Bid ---------------- AMZN +4 3/8 131.00 AOL +3 5/8 140.75 T -1 1/8 61.56 DJT --- 5.69 DD + 5/16 59.25 XON +2 11/16 72.81 INVX + 11/16 14.94 IP - 7/8 43.56 IOM - 5/16 6.75 KLAC +1 1/4 37.94 LU -2 5/8 85.81 SBUX - 1/4 45.06 COMS +1 11/16 35.00 TDFX - 1/2 14.81
Day Month Year History Annualized FOOL +1.80% 5.87% 69.36% 468.38% 50.21% S&P: -0.25% 1.77% 15.22% 143.93% 23.22% NASDAQ: -0.60% 4.50% 17.88% 157.03% 24.74% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 140.75 3770.55% 9/9/97 580 Amazon.com 19.11 131.00 585.48% 5/17/95 1960 Iomega Cor 1.28 6.75 427.18% 10/1/96 84 LucentTech 23.81 85.81 260.43% 8/12/96 130 AT&T 39.58 61.56 55.55% 4/30/97 -1170*Trump* 8.47 5.69 32.84% 2/20/98 200 Exxon 64.09 72.81 13.61% 2/20/98 215 DuPont 59.83 59.25 -0.98% 2/20/98 270 Int'l Pape 47.69 43.56 -8.66% 8/24/95 130 KLA-Tencor 44.71 37.94 -15.15% 7/2/98 235 Starbucks 55.91 45.06 -19.40% 8/13/96 250 3Com Corp. 46.86 35.00 -25.32% 1/8/98 425 3Dfx 25.67 14.81 -42.29% 6/26/97 325 Innovex 27.71 14.94 -46.09% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 99932.50 $97350.63 9/9/97 580 Amazon.com 11084.24 75980.00 $64895.76 5/17/95 1960 Iomega Cor 2509.60 13230.00 $10720.40 10/1/96 84 LucentTech 1999.88 7208.25 $5208.37 4/30/97 -1170*Trump* -9908.50 -6654.38 $3254.13 8/12/96 130 AT&T 5145.11 8003.13 $2858.02 2/20/98 200 Exxon 12818.00 14562.50 $1744.50 2/20/98 215 DuPont 12864.25 12738.75 -$125.50 8/24/95 130 KLA-Tencor 5812.49 4931.88 -$880.62 2/20/98 270 Int'l Pape 12876.75 11761.88 -$1114.88 7/2/98 235 Starbucks 13138.63 10589.69 -$2548.94 8/13/96 250 3Com Corp. 11715.99 8750.00 -$2965.99 6/26/97 325 Innovex 9005.62 4854.69 -$4150.93 1/8/98 425 3Dfx 10908.63 6295.31 -$4613.31 CASH $12005.75 TOTAL $284189.94

</THE FOOL PORTFOLIO>

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