It was April 1st, 1997, and we were all gathering at Morton's Steak House to celebrate Foolishness at our first annual Fool's Day Party. Fools from all over our part of the country had come together to celebrate good food, good company, and Foolishness in general. How wonderful it was to see at last the faces that went with the screen names we had been e-mailing and IMing for so many months.

We were all laughing, talking, and chowing down on choice edibles when somehow, by degrees, we slowly became aware of a foreign presence... the same way you'd notice bowling shoes with a prom dress, or a whiff of turpentine in a hot fudge sundae. Somehow all at once, everyone in the room turned to see him sitting there at the far table: The Churner.

The surprise was palpable. A fork dropped, clattering against a plate.

A woman gasped.

A gentleman swooned.

Waiters glanced about furtively, unsure what to do.

"Whatsamatter with everybody?" the Churner asked casually. "I paid for my ticket, same as the rest of you. Besides," he continued, relishing his next comment, "I'm a Fool now, too."

Jaws dropped. Audibly.

"You? A Fool?" asked a shaking voice from the back of the room.

"Is that so hard to believe? I'm a changed man, I tell you. No more churning accounts for me. From now on, it's strictly buy-and-hold."

Faces around the room were aghast. The Churner continued.

"Look, I've read The Motley Fool Investment Guide from cover to cover. Twice. And it's convinced me. No more moving my clients in and out of stocks over and over again, just so I can pile up the commissions. No, from now on I'm putting the interests of my clients first -- starting with young Larry here. Isn't that right, Larry?"

We hadn't noticed Lawrence until then. He was young, thin, and nervous to so suddenly be the object of our attention. "Hi everyone," he gulped, voice breaking.

"I've been working with Larry all evening," said the Churner. "He's just out of college, and he's got $10,000 to invest. We've been designing a Foolish portfolio for him, planned strictly according to Foolish principles. I've got a third of his assets in the Foolish Four, and the rest of his portfolio will be placed into a basket of 10 premium growth stocks -- each one chosen because it fits the Foolish stock-picking criteria. These are companies with good profit margins, relative strength numbers in the high 90s, large insider holdings, and with annual sales growth rates above 25%. Each one of these companies has a positive cash flow, and a PEG ratio below 0.50. In fact," he went on, proudly lighting up a stogie in violation of the posted No Smoking notice, "this is all basic Fool stuff. I got all of this straight out of Chapter 15 of Tom and Dave's book."

"Then I'd suggest you re-read that book, Churner. Because the portfolio you've designed is definitely not Foolish investing."

Heads turned. Somehow we had failed to notice that Motley Fool himself was dining in our midst.

*Why did Motley object to The Churner's portfolio?*

1) The Churner should be choosing from stocks with a low relative strength number, because they have more room to grow.

2) The Foolish Four approach should only be attempted in portfolios of $50,000 or greater.

3) The selection of 14 stocks is too many for a portfolio of this size.

4) Someone Larry's age should be investing in government bonds and money market funds.

The answer is 3.

"It looks to me like you've crashed our party in a quest to rack up more commissions, Churner," Motley went on. "By the time Larry finishes paying the full-service commissions on the portfolio you've designed for him, he'll already be in the hole more than 10%. Even if he were trading through a discount broker, the payout on so many different stock issues would be substantial -- and remember, he'd be hit with those commissions again when he eventually decided to sell those stocks, too. Your stock picks would have to perform superbly just in order for him to break even."

The Churner squirmed in his chair.

Motley went on. "So why handicap yourself so early in the game, Larry? The Foolish Four approach is a proven performer, and perfectly adequate for a portfolio of this size. One or two small-cap stocks, carefully chosen for their growth potential, can be included if you've done the proper research to back up your choices. And your returns won't be killed by all those commissions."

"Thanks, Motley," said Larry. "I guess I still have a lot to learn about investing Foolishly."

"You're young, Larry. You'll learn."

The Churner left in a huff. We spent the rest of the evening trying to decide which fork to use on the cheesecake.

© Copyright 1995-2000, 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. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us