Boring Portfolio Report
Monday, July 15, 1996

by Greg Markus (MF Boring)

ANN ARBOR, MI (July 15) -- Apparently, the first half of this year was all for practice. Stocks went up for a while, then they went down for a while. And after today, the market is pretty much back to where it was when we were composing our lists of New Year's Resolutions for 1996 and watching holiday bowl games on TV.

On what should have been a lazy summer Monday in mid-July, the Dow Jones Industrial Average suffered its fourth-largest point decline ever, while the NASDAQ barely missed establishing a new record for its largest single-day point loss. The Dow ended Monday's session off 161 points (-2.92%), while the S&P 500 fell a bit less: minus 2.51%. As for the NASDAQ, its 43-point implosion translated into a 3.91% loss.

The Borefolio, being a blend of NASDAQ and big-board stocks (as well as some cash reserves), experienced a decline in net value between that of the S&P and the NASDAQ: minus 3.31%.

The question that comes to the lips of those still capable of speech after such a day is: Why?

What happened that made the collective capitalization of publicly-held companies in America worth three or four percent less on Monday afternoon than it was on Monday morning?

Answer: I have no idea, and I very much doubt that anyone else does, either.

A few years ago, George Soros appeared before a committee of the U.S. Congress to explain how stock markets and, in particular, options and derivatives work. His basic message was that in an era of instantaneous information, computerized trading, neural networks, momentum investors, and so forth, markets are not "merely" random; they are, rather, nonlinearly dynamical processes: "chaotic systems," to use a phrase uttered by more folks than who understand what it implies.

What this means is that, sometimes, a single definable event will trigger a cascade of subsequent events that results in a seemingly understandable market outcome for that day (such as, for example, when an unexpected monthly aggregate employment report triggers a sell-off, as happened the other day. On yet other occasions, such as today perhaps, nothing in particular occurs -- or rather a myriad of minor events occur -- generating a similar result. Even if you *knew* the inputs, though, you could not reliably forecast the outcome. So don't waste your time.

Marvelous. So what's the action implication of all this? As best as I can tell, it's the same old story: select a well-diversified portfolio of stocks of excellent companies that have demonstrated an ability to generate strong and growing earnings. Try to purchase the stocks when they are trading at or (preferably) below your best estimates of "fair value." Then hold them until sufficient new information comes along to indicate that you should sell.

All seven current Borefolio holdings are stocks of companies that are arguably the very best in their niches. All of them have demonstrated a capacity to grow earnings at market-beating rates, and all of the stocks are trading at or below fair value, as based on their current and forecasted per-share earnings. No new information presented itself today to cause me to revise my opinions about them.

Green Tree Financial and Texas Industries both held their quarterly conferences with analysts this morning. Both companies beat consensus expectations for the quarter. Both expressed confidence that they would meet analysts' and shareholders expectations over the coming year. Both stocks went down.

Prime Medical Services has indicated that they have no intention of giving their stock away at current depressed prices and will hold off on their planned secondary offering until the market improves. At the end of today, PMSI shares were trading for less than they did when the company was forecasted to perform roughly half as many lithotripsy procedures as it is now projected to perform, now that it had merged with Lithotripters, Inc.

Oxford Health Plans was downgraded by a Morgan Stanley analyst from "strong buy" to "outperform" today, and the stock lost $3 7/8. Cisco Systems, in contrast, was not downgraded by anybody and is rated a "strong buy" by nearly every one of the 30 or so analysts who follow the company. But it lost $3 1/2 nonetheless.

Borders Group? The folks at Borders are absolutely bewildered by what's happened to the price of BGP shares. Possibly, the news that workers at the Ann Arbor Borders are *considering* unionizing is sufficient to cause a stock to plummet $2 7/8 in a matter of hours. If so, then BGP certainly appears to be one terrific bargain.

Oh, yes. Shaw Group popped *another* $1 3/8 on heavy volume. Why? Other than news already out there and that we've discussed recently, I have no idea about that, too.

So now that we're done bowling the practice frames, I guess the match will start soon. I'm delighted with what I'm holding in the portfolio right now, thanks.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 7/15/96