FOOL ON THE HILL
An Investment Opinion

The BEST Stocks!!! Circa 1995

By Bill Mann (TMF Otter)
October 1, 1999

Ah, October. Time to break out the oranges and browns, and rakes. Well, here in Virginia, at least. In Florida you're more likely going to a slightly sturdier flip-flop, and that's about it.

I have a confession. When I was little I heard that it was good luck to wake up on the first day of the month and look at each corner of your room and say "Rabbit." Maybe this was just some strange North Carolina thing. I don't know.

The thing is, I have never once remembered to do it. That's, by my count, 240 or so consecutive months in which I have forgotten to give myself good luck. Good thing I don't break mirrors or I'd be in grave danger.

It is a Foolish tenet that investors are ill-served by the rantings and ravings of the Wise media. Do we really require them to tell us what the best stocks are? At least annually all of the big journals have a feature with their hot picks for the year, week, whatever. It is the rare occurrence to see them review the performance of these picks.

But I'm glad to do this, and at no charge. I might be able to answer a few questions along the way.

Is the individual investor well-served to use these picks as a basis for his or her portfolio? You'd never get the answer from the magazines themselves, as they are much more willing to promote the next list of winners than go back and review the last ones.

For this Foolish research project I picked up the Money Forecast 1995 issue from the depths of the stacks at the Central Library at Fool HQ. Our library contains nearly every conceivable financial resource, except, interestingly, The Motley Fool Investing Guide. Curious, don't you think?

Ah, but I digress. At any rate, using this issue, published nearly five years ago (lead article "'Newt' Congress and Your Money"), I've set up a portfolio consisting of equal amounts invested in each company listed. Money selected Lowe's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> as its "BEST IDEA," and as such I have doubled the investment in that company. Also included are Kroger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %>, Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>, United Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %>, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAT)") else Response.Write("(NYSE: MAT)") end if %>, and Pep Boys <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBY)") else Response.Write("(NYSE: PBY)") end if %>.

In this particular issue, Money's writers selected seven blue chip companies. The companies they chose, by and large, are excellent. In fact, I am actually surprised that this list actually trailed the S&P 500 for that year. But that's the rub, isn't it. A year is not a very long time to hold a company, and it's certainly not the optimal time period to judge an entire portfolio. But that's what these magazines do, so I'll work within their strictures... to a point.

So, let's see how Money and its posse of stock pickers ne plus ultra have fared.

Money's Blue Chip HOT PICKS!!! 1995

        Return through end 1995  Return through today
Lowe's (the BEST IDEA) -9%             260%
Kroger                 64%             405%
Oracle                 67%             534%
United Healthcare      29%               4%
Mattel                 52%              19%
Microsoft              43%            1177%
Pep Boys               18%             -52%

TOTAL RETURN           27%             363%

While it would probably be more demonstrative (not to mention fun) for me to be able to trash Money's stock picks, I can't really make too much fun of a solid 27% return. I will note that the S&P 500 saw a healthy 37% increase in 1995.

But the problem with any "Hot Stocks Now" article is that NEVER do they come back in the next "Hot Stocks" issue and say, "Well, the stocks we told you about last time were really good. You should just hold those." Nope, that doesn't sell magazines. They need to have something new. So they come up with a 1996 list. And 1997. And so on.

But look what happens if we do the Foolish thing and just hold on to these great companies they identified in late 1994. If the Money editors had taken the Foolish route and bought the best companies and held them (we are assuming here that they felt these companies were in fact the best) they would have returned 363%, outpacing the S&P returns of 332%.

In other words, they could have done a slew of homework in 1994, invested, spent 30 minutes or so every quarter reviewing the performance of each company, and come out well ahead.

But get rich slow just doesn't sell. Or does it?

Incidentally, Money's editors also selected 12 mutual funds they expected to be big earners. I won't bother with these too much, but note that if you invested $10,000 equally divided among the selected funds, you would now have $22,387.44. Not bad, right? Well, these managed funds underperformed the S&P 500 by more than 8% per year (25.79% vs. 17.49%). So if you invested in the S&P, your original investment would currently be worth $31,494.20, a difference of 40%. But certainly these "hot" mutual funds would have been replaced by new "hot" funds the next year, resulting in even more transaction friction.

You see, the problem lies in the human tendency to look for the next big thing. Sometimes the current big thing IS the next one as well. The trick is to look for the company that is going to be the big thing for decades, buy it, and stick with it. But that's boring, right? I don't know about you, but I don't invest to be swashbuckling, nor does derring-do get extra brownie points in the end. It's all about returns, and by moving back and forth, the followers of the whims of Money and all the other financial gooroos are playing more to the benefit of the sellers of magazines than to themselves.

If I had a hot stocks column it would read much like a Rolling Rock ad:

"Same as it ever was."

No wonder they're not banging down my door. I'm not Wise enough.

In the spirit of the opening day of hockey season, I'd like to close this article by giving a tip o' the jester's cap to Tim O'Neill, a longtime Fool, who as luck would have it is in my fantasy hockey league. Unfortunately, his silly team has no chance against my juggernaut Vienna Boys' Choir. Let the puck drop!

--Bill Mann, October 1, 1999