FOOLS AND THEIR MONEY

By JONATHAN A. ABBEY Sunday, June 24, 2001
    • Small investors have always fretted that they are the last to know when it comes to stocks. But their status at the bottom of the information food chain is changing, and quickly. "This is a revolution," says David Gardner, who with his brother Tom is responsible for starting the wildly popular online personal-investing forum called the Motley Fool. Located on America Online, the Fool (the name is inspired by a line in Shakespeare's As You Like It: "I met a fool i' the forest, a motley fool") has spearheaded a spectacular shift in the way investors' money is funneled into the stock market and challenged Wall Street brokerages for control of information (and rumors) about companies and their prospects. Drawing more than 350,000 visits a month, it is the most prominent of a growing number of online sites, such as the Silicon Investor www.techstocks.com ) or the newsgroup misc.invest.stocks, where investors can ask questions and share knowledge. Says David Gardner: "The small investor wasn't getting a fair shake. Wall Street analysts often had conflicts of interest on the stocks they were touting. They were trying to generate commissions and make their clients' stocks go up."

    The Gardners aren't money managers, but they are investors, and they use the power of online communication to spread their insights. They began investing in stocks at age 18, started an investment newsletter in 1993, and now, at the ripe old ages of 28 (Tom) and 30 (David), direct the Fool's daily operations from a small office in Alexandria, Virginia. The Fool's mission is to take some of the mystery out of the game by offering basic advice outside the Wall Street loop. The real action is on the Motley Fool electronic bulletin boards, where plugged-in investors trade info and gossip with a spirit of camaraderie that can be quite hostile to nonbelievers.

    Since starting its AOL forum in August 1994, the Fool's most notable accomplishment has been discovering a company called Iomega long before the wing tips in downtown Manhattan did. Iomega, based in Roy, Utah, makes devices for computers called Zip drives and Jaz drives that enable users to store massive amounts of information speedily, reliably and affordably. In early 1995, various Fools, as the participants call themselves, began posting news about the first Zips to hit the market. They soon put their money where their modems were and reaped the rewards. Many of the earliest posters on the Iomega board have seen their initial investment rise more than 7,500%.

    Not surprisingly, Iomega stock has achieved something like sacred status with its followers--and may also have created one of the biggest short-selling debacles in recent Wall Street history. Short sellers, who bet that the price of a stock will fall, thought they saw easy pickings in Iomega's skyrocketing price. Anticipating a slump, they borrowed millions of shares and immediately sold them, hoping to buy shares back later at a cheaper price. The slump never came, as the Fools furiously beat back any attempts made to bad-mouth the stock. According to the Wall Street Journal, the short sellers lost nearly $1 billion.

    Although much of the investing philosophy the Gardners preach is quite conservative, many of the Fools have become very aggressive in selecting--and promoting--stocks in this bull market. They look for "story" stocks, companies that have a promising product or technology but may not earn much money for years. Since most Wall Street analysts look for a few quarters of earnings growth before they invest in a company, this is one way the Fools can beat the Street.

    The latest additions to many Fools' portfolios are Amati Communications and Ancor Communications, small telecommunications-equipment companies hoping to capitalize on the growing worldwide need for higher data-transfer bandwidth--think of it as the asphalt of the communications superhighway. Amati, based in San Jose, California, makes equipment for ADSL (Asymmetric Digital Subscriber Line), a superfast technology that will allow users to receive real-time video through their phone lines. The company came to the attention of the Fools last November when somebody with the screen name of "Bhale 7" began a discussion on the Networking board. After much research by numerous Fools, investors began piling into the stock, which was then around $5 and is currently trading for $29.

    A more recent discovery is Ancor, located in Minnetonka, Minnesota. Ancor is the leader in developing products for fiber channel, another ultrafast means of moving information. Ancor was first noticed by the Fools in March when the stock was around $6. It went as high as $41 before settling in at its current price of $22.25.

    One of the leaders of the bandwidth Fools is Leeza Rodriguez (screen name:"MF Mom"). She's the typical atypical Fool: a 36-year-old mother of two who was a fashion model for six years and a petroleum engineer for two more. Surfing the Web in 1994, she ran across a chart that illustrated the enormous increase in traffic on the Internet. She thought, "This is huge, like the growth of the railroads in the 19th century." Rodriguez began reading up and grilling companies about their prospects. She started to share her knowledge on the Fool in January 1995 and so impressed the Gardners that in October they hired her to moderate the Networking board and be a networking industry analyst.

    The Fool's progress includes the AOL site; a best-selling book, The Motley Fool Investment Guide; the Gardners' monthly column in SmartMoney; and a Website located at https://fool.web.aol.com . The two plan to expand even further, especially since their exclusive contract with aol expired April 1. "We want to be everywhere: TV, radio. CompuServe and Microsoft Network are also possibilities," says David. They shouldn't lack for offers. Since they started their online portfolio in August 1994, they boast a 243% return compared with a 47% increase in the S&P; 500. Not a bad record for revolutionaries.