Rule Breaker Portfolio

Fool Portfolio Report
Thursday, May 1, 1997

by Tom Gardner (TomG@fool.com)


ALEXANDRIA, VA, (May 1, 1997) -- The learning adventure continues here at Fool HQ, as we voyage onward in search of the greatest businesses in which to invest, the most threatened business which to short, and the most efficient way to manage a market-beating portfolio.

Our digital pages on the Web and on America Online are literally a gold mine for investors of all levels. Yesterday's Daily Double on Penn Traffic Co. tells the tale of a supermarket company fighting for its life, with its mastermind new CEO, Phil Hawkins.

In our Evening News, Randy Befumo (TMF Templr) discusses the battle for dwindling profits in the electronic-components industry.

And among the hundreds of notes in our Beating the Dow folder on the Web, you'll find stuff like this:

I have run the figures for annual holdings of
the DJIA & S&P500 for every month, going
back to 1955. . . Here's what I've found. . .
- rayvt@comm.mot.com (Ray)

And tucked away down deep, there for the explorer only, is an old Fribble I wrote entitled, "The Foolish Guide to Simpleton Investing." In support of it sits the Cash-King folder, wherein the only posts that draw response are those that prize long-term investing, thoughtfulness, basic mathematics, flair and Foolishness.

What is cash-king investing?

The underlying philosophy of cash-king investing is nothing that our nation's tee-ball players couldn't grasp. It holds that those companies which are:

a. Capitalizing on new technology
b. Driving substantial profit
c. Growing faster than the market
d. Generating cash-internally
e. Eschewing debt and equity financing
f. Proven winners

are often ones whose stock will significantly outperform the market in the years ahead. Cash-king investing concentrates on businesses that methodically and enduringly please customers, make money, and reward shareholders.

And what's a Simpleton Investor?

A Simpleton Investor is the long-term investor who, working in her garden this evening, has yet to quote her stocks this week. Simpletons don't subscribe to high-priced financial newsletters; they don't perk up when the latest guru prattles on about a hot stock on financial television; they don't trade paper slips; they hate commissions and short-term tax rates; and they buy ownership positions only when they expect to hold onto the position for at least five years, preferably ten, ideally fifty.

So what?

The approach seems to make sense, if you believe that investing should be all about maximizing monetary and intellectual profit. Investors in The Coca-Cola Company over its seventy-seven year history as a public company have enjoyed compounded annual growth of 16.6%. Untouched, that growth has translated a $3,000 investment into $295 million today, after taxes.

Fribbler George Runkle reminds us in his work that any of our ancestors who traded 50-cent mining companies, hoping to win big, mostly lost. Conversely, the buyer of businesses -- not stories or high-priced analyses, but businesses -- has been neatly rewarded for centuries.

What sort of investors win?

By treating the public marketplace as nothing more than a crowded square full of private companies, the 20th century investor in U.S. stocks has filled moneyhouses high with cash, has been able to pick and choose their work and living environs and, in the most healthy cases, has aggressively given that money away for the better good.

This investor has also learned that our public businesses provide us with some extraordinary tales of pettiness, of woe, of joy and creative endeavor. He has learned that when they work, our corporations provide better services at lower cost than anywhere in the world. He's learned that when they don't work, they bring discomfort to everyone involved -- clients, stakeholders, employees, managers, community neighbors, etc. Above all, the buyer of businesses has come to recognize that companies are run by actual people -- people who act brilliantly at times, at times unspectacularly.

And he knows that patience and the desire to always learn more drives market-beating profit.

So where are these great companies?

Back in early July of 1995, I presented a portfolio of stocks for investors to consider in the Cash-King folder on America Online. These stocks met the qualifications above -- proven and profitable technology leaders without debt. And I promised readers that together we would track their performance not for two hours, two weeks, two months, not for two years even.

Instead, I would promise not to propose the addition of any new stocks or the subtraction of any dogs for the next ten years. The aim was and is to minimize brokerage commissions and tax hits, to reduce the amount of time spent investing, and to maximize returns. Again, this portfolio will not be traded once for the next ten years.

Show me the numbers.

Herein lies the performance record for the ten cash-king stocks, the overall portfolio, and the S&P 500 since this was hatched in July, 1995. All of this is documented and dated on America Online and will be available on the Web. Here are da numbahs:

Purchase Present Total Company Price Price Gain Dell Computer $16.06 $86.75 +440% Microsoft $47.81 $121.00 +153% Sun Microsystems $12.69 $28.63 +127% Intel $68.25 $153.75 +125% Cisco Systems $27.63 $53.38 +93% America Online $26.56 $47.00 +77% Gap $17.38 $30.75 +77% Hewlett Packard $39.94 $52.25 +31% Texas Instruments $70.94 $89.50 +26% Silicon Graphics $43.25 $15.25 -65% TOTAL n/a n/a +108.4% S&P 500 556 799 +43.7%

The Cash-King portfolio is sufficiently crunching the S&P 500, which over 80% of all equity funds have trailed over this twenty-two month period. Again, the portfolio has not seen a single trade, not a single commission, nor will it for the next ninety-eight months.

Any lessons learned, two years in?

There are some fine lessons here, I think.

A) The Arf Principle
It seems like there has to be at least one dog in every portfolio. Silicon Graphics has run into problems on its Unix-based server software and has been hammered throughout. The stock is now down 65% for the lowly Simpleton.

B) The Resiliency Principle
Check it out, Texas Instruments fell with its industry all the way to $37 from $85. Today the stock closed on a last-trade of $89 1/2. Many greatly profitable technology leaders bounceback. The story stocks, funding themselves through new share offerings, don't so often.

C) The Patience Principle
All ten of these stocks have dropped significantly and been mistreated by the financial press at some point over the past two years. Even Dell, one of America's greatest stocks this decade and up over 400% for the Simpleton, has seen multiple declines in excess of 30%. To invest successfully even in the greatest companies, you must be able to endure sizable declines to win the significantly more sizable rewards.

Conclusion

Fooldom is bursting with wonderful investment ideas and valuable discussion about hundreds of individual stocks. You needn't buy into any single approach or idea to beat the market. The blend of Foolish Four stocks, the somewhat hit-or-miss nature of small-cap investing, the shorting of Quarterdecks and Donalds, the profit from buying America's most profitable companies -- these and much more are out there for your consideration.

And there's no rush.

After all, it took those lifer Coca-Cola investors fully seventy-seven years to make their first $290 million.

Tom Gardner, Fool

P.S. A couple squib notes:

1. Profound apologies to our America Online subscribers for the ongoing difficulties AOL is having with their message-board technology. It really is dismal right now.

2. Our Web boards are up-and-running with Fools from across the globe posting. Unfortunately, those boards are not visible via AOL's browser, which doesn't presently meet HTML standards. To view them, please download Netscape or Internet Explorer.

3. The Fool Portfolio beat the S&P 500 today, as America Online and 3Com rose $1 7/8, and KLA Instruments was up $2 1/2. The overall account was up 0.72% versus an S&P decline of 0.35%.


TODAY'S NUMBERS
Stock Change Bid -------------------- AOL +1 7/8 47.00 T + 1/2 34.00 ATCT + 3/4 3.81 CHV - 1/2 68.00 DJT + 3/8 9.00 GM - 3/8 57.50 IOM - 1/2 16.75 KLAC +2 1/2 47.00 LU + 5/8 59.63 MMM + 1/8 87.13 COMS +1 7/8 30.88
Day Month Year History FOOL +0.72% 0.72% -3.47% 157.63% S&P: -0.35% -0.35% 7.80% 74.20% NASDAQ: +0.77% 0.77% -1.59% 76.41% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 16.75 564.68% 8/5/94 355 AmOnline 7.27 47.00 546.49% 8/11/95 125 Chevron 50.28 68.00 35.23% 8/12/96 110 Minn M&M 65.68 87.13 32.66% 10/1/96 42 LucentTech 47.62 59.63 25.22% 8/12/96 280 Gen'l Moto 51.97 57.50 10.63% 8/24/95 130 KLA Instrm 44.71 47.00 5.12% 4/30/97 1170 *Trump Hot 8.47 9.00 -6.27% 8/12/96 130 AT&T 39.58 34.00 -14.09% 8/13/96 250 3Com Corp. 46.86 30.88 -34.11% 10/22/96 600 ATC Comm. 22.94 3.81 -83.38% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 16685.00 $14103.13 5/17/95 980 Iomega Cor 2594.53 16415.00 $13820.47 8/12/96 110 Minn M&M 7224.44 9583.75 $2359.31 8/11/95 125 Chevron 6285.61 8500.00 $2214.39 8/12/96 280 Gen'l Moto 14552.49 16100.00 $1547.51 10/1/96 42 LucentTech 1999.88 2504.25 $504.37 8/24/95 130 KLA Instrm 5812.49 6110.00 $297.51 4/30/97 1170**Trump** -9908.50 -10530.00 -$621.50 8/12/96 130 AT&T 5145.11 4420.00 -$725.11 8/13/96 250 3Com Corp. 11714.99 7718.75 -$3996.24 10/22/96 600 ATC Comm. 13761.50 2287.50-$11474.00 CASH $49020.02 TOTAL $128814.27








Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.