SMACK! -- you know that feeling when you get the wind knocked out of you? That's how our Rule Maker Portfolio feels right now. We took it on the chin today in JDS Uniphase (Nasdaq: JDSU), Nokia (NYSE: NOK), Microsoft (Nasdaq: MSFT), and Yahoo! (Nasdaq: YHOO). Those bruises were somewhat soothed by substantial gains in American Express (NYSE: AXP), Coca-Cola (NYSE: KO), Pfizer (NYSE: PFE), and Schering-Plough (NYSE: SGP). Even so, the net result was an overall loss of more than 4%.
Depending on the size of your portfolio, today's losses could've bought a car... or perhaps a house... or maybe it was only a steak dinner. For the MakerPort, it was somewhere in between. No matter which it was, though, watching the value of your portfolio drop stings. But even when the stock market doesn't have you all smiles and tap-dancing around the house, your stocks should never keep you up at night -- never ever. More than anything else, Foolishness is about controlling your money, not letting your money control you.
I had originally intended to use today's report to meander through Yahoo!'s just-released 1999 10-K using our now-updated Rule Maker Criteria. Where once there were ten criteria, now there are eleven, thanks to the addition of our new Cash King Margin. Also new in the criteria, we've updated all of the quantitative examples using Intel's (Nasdaq: INTC) fiscal 1999 financial results. In case you didn't already know, applying the criteria to a prospective investment is made super-easy by our RM Essentials spreadsheet, which also has been updated to handle all eleven criteria. Be sure to check it out when you get a chance. For the rest today's column, however, I want to point out three critically Foolish principles to hold onto in a falling market.
- Money in stocks is money for the future.
- Don't borrow to buy.
- Utilize concentrated diversification.
Are you queasy over your portfolio's performance of late? If yes, then you probably aren't operating in long-term mode. Long-term mode is a state of mind that enables you to relax, live and enjoy life to its fullest, and be a great investor. It's a laid-back attitude of never getting too worked up over big losses -- or big gains -- because of the realization that money in stocks is money for the future. You'll never have reason to worry about a day of losses in the market if your stock investment horizon is set squarely on the future, at least five years out.
How can you bask in the nonchalant bliss of long-term mode, you ask? By living beneath your means. By saving 10-20% of each paycheck. By paying off your credit cards every month. By keeping six months of living expenses in a money market fund. If you do all these things, then you'll be ready to really invest -- worry-free, with a clear mind, Foolishly -- for the long term.
The second principle is related to the first, but it bears mentioning here. According to a recent report, margin debt is at an all-time high as a percentage of total stock market value. Margin is incredibly enticing during a strong bull market, but it's impossible -- I repeat, impossible -- to operate in long-term mode if the margin clerk is at the door.
Some risk-tolerant and highly disciplined investors choose to use margin on a very limited basis. To each his own. As for me, I've given up entirely on the idea of borrowing to buy stocks. I wrote about this decision back in December ("A Marginal Opinion") but to sum it up, margin forces you to have a short-term mentality, it causes you to be less disciplined in your investment decision-making, and finally it's simply not necessary. Seek to build wealth slowly. By setting aside just $100 each month, compounded at 15%, you'll have $150,000 in 20 years. That's what the Drip Port is aiming to do with its monthly investments.
Among our 12 Rule Makers today, seven were down while five were up. Our holdings in software, computer chips, and Internet infrastructure are balanced by the leaders in pharmaceuticals, beverages, and financial services. Holding great companies across a wide range of industries gives a portfolio the ballast necessary to endure rocky markets. Wall Street always has its darlings, and many of those companies make for great investments, but we should never neglect great companies just because their stocks have underperformed recently. The diversified Rule Maker approach, which Zeke wrote about last month ("The Zen of Rule Maker"), shows its merit on days like today.
With those three principles in mind, let's look on the bright side of things. Our nation is benefiting from low inflation, low interest rates, strong employment, revolutionary productivity-enhancing technology, and booming entrepreneurialism. Technology stocks may be falling, but the sky is not. The upside to the downslide is that merchandise is on sale. When traders are yelling SELL! Fools are hearing SALE!
Fools who invest fresh cash on a regular basis relish opportunities like today. That's our portfolio's attitude right now. I'm happy to see Yahoo! pull back so that we can use our April $500 to buy three shares instead of only two. Yep, in the next five trading days, we'll be adding to our Yahoo! position. Last Monday's report (Yahoo! in Hypergrowth) outlined our basic rationale for liking Yahoo!'s prospects.
That's it for tonight. Watch some basketball, check out our updated RM Criteria, and rest easy with a long-term perspective. Finally, for the latest on what's happening in the Microsoft/DOJ case, the Fool's Bill Barker has the scoop.
-Matt
