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October 7, 1998

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Subject: Dear TMFKeeler
Author: Vic3

Regarding your post 561, I'd like to let you know what I think is the "beauty" of the portfolios in TMF.

Beginning in Jan this year I studied TMF Guide to Investing, studied this web site, talked to friends, read other books, selected the Fools to guide my initial steps into the market, followed the 8 step screen, did the ratios, modified the pure method to be more conservative (more large caps), figured the PEGs, sold my all my mutuals, opened an on-line account, and prepared to buy my stocks.

There was one problem. Everything I looked at was WAY over 1.0 PEG. Some where over 2.0. Only the lousy stocks were less than 1.0. If a stock could come close to passing the Fool Screen, it was in the clouds.

What's a novice to do? I looked at the Fool Port to see what they were doing. They were holding AOL, AMZN, and Iomega (there's a success story...). AND they were buying high priced stocks. SOOO, following the example of my chosen mentors, I bought high priced stocks. When? First week of July 98.

I've been investing in mutuals for 21 years. I have now lost 31% (34% at the low point) of my life's savings. In 10 years my children (three of them) start college. This is not a theoretical game to me.

It was my decision and responsibility... I chose to follow the Gardner's advice. I selected the stocks (lousy ones like MSFT, DELL, HBOC, CMGI, TMBS, BBY, and a Foolish Four...CMGI was very aggressive... knew that going in, but no more than AMZN). The depth of my responsibility does not diminish the Gardner's responsibility to (1) follow their own published advice, (2) let us all know if and when they change their ideas. If the PEG is not very important in valuation, that fact didn't come out in their book. Were there other factors? Of course, but MOST important was the PEG... so important that they had to name it after themselves... the Fool Ratio. They are making money by selling advice on how to invest in the stock market. They did not set out to make a one-time killing and run. They set out to create a following. They've succeeded. Therefore, they have total responsibility to keep that advice current. They have NOT done that. I resent it and so should every other investor that they have misled.

Oh yes, they warned about down markets. And I've read the hypocritical disclaimer in TMF(http://www.fool.com/Help/Disclaimer.htm). We know the Gardners don't give specific investment advice (huh??). If the disqualifiers are all we can believe, then their advice isn't worth my time.

Can we believe that the advice posted on determining a PEG is accurate? Does or does NOT a PEG of 1.0 for a small to mid-size growth stock mean the stock is fully valued? Should we or should we not sell stocks that reach PEGs over 1.0?? Are other factors now more important in valuation than they were back in 1994? Should we or should we NOT buy stocks that are over-priced?? THESE THINGS SHOULD NOT BE TOO HARD TO KEEP UP TO DATE IF THEY CHANGE THEIR MINDS. Put these changes on the HOMEPAGE in a headline. What decisions in the stock market are more important than the decisions to buy and sell?

Sorry, I guess if they put the new info on the web for free and made it easy to find, then their next book wouldn't sell as many copies... I see. Very sound business reasoning. Meanwhile thousands of loyal followers continue to follow the advice... and continue to lose money and sleep because of it. If all this isn't exactly fair to them, that's ok... they haven't been exactly fair to me and others like me.

There's only one thing to do. Treat the Fools like all other talking heads. Listen to them with a critical ear, but under no circumstances believe them. Some of what they say may resemble good advice, some may be hogwash. Understand that they are out to make money off of YOU. They are another set of experts marketing their product.

Meanwhile they testify in front of Congress as champions of the people. Bravo.

[TMFKeeler's Response Follows]

I couldn't agree more with what you said. That would bring up the other confusing thing at this site (and beautiful in its own way): who are these TMF people running around. We are paid employees but give our own opinion. I think you are right on with your critique of the Fool Portfolio as it relates to the Motley Fool Investment Guide.

It sounds like you knew what you wanted to do (invest in solid small caps at reasonable valuations); but when it came time to act you fell back on the crutch of listening to other people. Finding a stock that meets all the Fool 8 criteria and has a PEG near 0.5 is not easy, I know. I've found two in two years. AFAIK, no stock like that has been in the Fool Portfolio.

Tom and Dave Gardner are very young ;-) Like all of us, they know you can never stop learning. Tom likes larger caps in general and has set off to the Cash King Portfolio to follow his fancy. Dave is the brother that likes small caps and he has posted in the Foolish 8 folder lately that he has down played the PEG in his own investment thinking. Personally, I think these classic valuation metrics have not been around 100 years for nothing. In the end, all stocks will come back to them.

However, in defense of the Fool Port and especially its holding AMZN and AOL, these are new types of companies. They are more like cable companies in that subscribers seem to mean the most in determining future earnings. Cable companies never could be valued using PEGs and PSRs and neither can these new internet software stocks. Or so the theory goes.

You switched from mutual funds to individual stocks at the market top. If you had stayed in the funds you would probably be down close to 31% anyway. With 5-7 years of investing on the horizon I'd wait to at least see a bull market before abandoning your Foolish approach. Bull and bear markets come and go but great growth companies keep growing.

Patrick


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