Thursday, December 26, 1996
Fool's Gold
by FlyngCircs

Before I started reading (surfing?) the Motley Fool in the summer of 1995, I thought I had a pretty good "system" for picking stocks. Heavily dependent on Value Line, I tried to combine high growth with low Price/Earnings ratios. I was turning it over quarterly, but every Friday I'd frantically thumb through that week's issue of Value Line to see if (gasp) any stock's Timeliness rank had dropped. While I got in early on a couple of Boring stocks (BIOA, SSW), I had too many stocks to follow and not enough time to understand any of them.

After perusing the historical statistics on Beating the Dow, I said "what the heck" and allowed Fooldom a small place by buying the Foolish Four in January. But I insisted on keeping my "system" for my other stocks, putting me in really dynamic, growing stocks like McDonnell Douglas, Loew's, and IMC Global. These companies, while safe and large, didn't have market dominance, exciting new products or even significantly growing revenues. As they drifted lower (down 7% through April), I learned the painful lesson that stocks usually have low P/Es for a good reason. Meanwhile, I watched, amazed, as the Foolish Four -- other safe, large companies -- stayed true to their nickname and began their ascent to what has become a 20+% annual gain.

Then MF Cormend hit the wires with Beating the S&P. More big, high yielders, ideal for what the Wise were calling a way-overvalued market. Needing to dump my four dogs, and seeing the preliminary BSP numbers, I converted and added Iomega (but that's another story!) Those stocks are up an average of 15% over the last 6 months or so.

Searching for another area to learn about, the writings on mutual funds were next, and it occurred to me to benchmark my mutual funds. Gee, guess what? Four of my six were under-performing the S&P over 1, 3 and 5 years, and then charging me a high expense ratio and distributing capital gains, costing me taxes. Can you say "index fund"?

But now what? I had too much time! No frantically pawing through Value Line! No having to trade at least once a month! I even sat out the July correction! What to do? Hmmm ... how about RESEARCH? I had the time to develop screens to turn up the likes of 3Com, and identify and research two small-cap growth stocks, using all the criteria discussed in The Motley Fool Investment Guide. Those two are now up an average of 30% over 6 months.

The final bonus was MF DowMan's IFG area and the gradual evolution of what is now the Unemotional Growth model. More great stocks, more great returns (of course, with more risk and more trading).

Of course, I know that money doesn't grow on trees. There will be very few times in my lifetime when the Dow is up a compounded 60% over two years, some of my picks will still be losers and the chances of the market going down next year are large. But I'm invested for the long term, measured in decades, not months. The happy ending to this happy story is this. Thanks to the Motley Fool crew, I've learned more about stock valuation, research, and successful long-term investing than in several portfolio management, investing, and finance classes. I've cut down on turnover, identified better stocks, saved $550 a year by not renewing Value Line and gained time to spend with my family. Oh yeah -- and my returns have beat the pants off the S&P.