Rule Breaker Portfolio

Fool Portfolio Report
Monday, December 8, 1997
by David Gardner (DavidG@fool.com)


ALEXANDRIA, VA (Dec. 8, 1997) -- The Fool Portfolio rose 0.85%, FINALLY beating up on the S&P 500 for a day (down 0.14%), though lagging the Nasdaq (up 1.08%). For the year, the Fool remains ahead of the Nasdaq by a percentage point, and has now pulled within four points of the S&P 500. As we move into the home stretch, we'll hope our horses are ready to carry the Fool back to the Winner's Circle for a fourth consecutive year.

If it doesn't work out that way, no tears will be shed. Another fine year for equities investors!

Given that Iomega divested itself of $137 million of its market cap Monday (down $1 3/16), I was particularly pleased we still rose almost 1%. That's thanks to continued strength in America Online (up $2 3/4, our stock of the day) and Amazon.com, and rebounds in three beaten up technology holdings of ours: Innovex, KLA-Tencor, and 3Com, which all rose more than a buck.

I want to begin right off tonight by announcing the publication and immediate availability of The Motley Fool's Industry Focus 1998. A follow-up to our popular year-end publication last year (Industrial Evolution), the Focus delivers a thorough examination of twenty top industries, highlighting the most promising investment prospects in each for the year ahead. It's 90 pages worth of holiday reading, colorful and educational and informative, written by The Motley Fool News and Research Team. It's now featured in Foolmart for $35. Tap out http://www.foolmart.com, if you're interested.

Now let's change gears a bit, as we do from time to time. You see, while most financial writers teach you about investing by focusing only on the financial markets themselves, we -- as you well know by now -- are Fools. From the outset of founding The Motley Fool, we've made a point of casting our eyes over all intellectual disciplines, all subjects, searching for the glittering rocks that we might chisel into investment-lesson gems in our quest to debunk the conventional Wisdom.

Today is no exception, as we turn our gaze very briefly to... college basketball?!

Yes.

And let me say at the outset that no real knowledge of, or interest in, college basketball is necessary to read today's recap.

At the outset of every new season, the media (read, "the Wise") put out a poll that ranks the top 25 teams in the nation... before the season has even started. And over the course of the first several weeks of the season, every game and every result is viewed through this limiting (and completely subjective) eyeglass.

So for instance, if you are ranked #5 to start the season, you can lose your first two games and still manage to avoid dropping out of the ratings altogether. Meanwhile, a few hundred teams are not "rated" in the top 25 at all, and so they will have to win numerous games impressively even to reach #25.

The problem with this scenario is that the playing field is artificially tilted toward those teams with rankings and media exposure, causing lots of confusion and misunderstanding. Rather than reserving judgement on the skill of teams until we've been able to observe them ALL play and measure their performance, we grant them these unscientific ratings that they have to play their way out of.

Very unFoolish.

Truth be told, there should be NO preseason poll at all. But with preseason hype and magazines to sell, the media just can't help themselves.

The Fool has, for years, watched and loved a fellow named Jeff Sagarin, an MIT grad who has created "power ratings" that measure every game played over the course of the NCAA basketball season. He simply measures (1) which team won each game, (2) by how much, and (3) whether the game was played home, away, or on a neutral court. Using those three simple NUMERICAL and EMPIRICAL factors, Sagarin creates ratings that you can follow at http://www.usatoday.com/sports/basketba/skm/skmjs.htm. And because I have followed them for years, I can tell you that these are far more accurate at present than the polls.

A couple quick examples. Last year, the University of Minnesota -- unranked at the beginning of the season by the media -- was already in the top 5 teams in the power ratings in December. At the end of the year, Minnesota (which the media had finally credited as a top 5 team) advanced to the championship semifinals... one of four teams to do so from more than 300 teams in Division I. A few years before that, the University of Cincinnati basketball team -- a complete unknown at the time -- vaulted out of the blue into the top 10 of Sagarin's power ratings in December as well. It took weeks for the media polls to even credit the team with a top 25 ranking... Cincinnati went on to be one of the dominant teams in mid-'90s hoops.

I'll not belabor the point further, so let's take it back to investing.

Dear Fool, please do not base your investment decisions on what money magazines put on their covers. Do not count on Joe Journalist to "rate" the stocks for you. And don't lose sleep waiting for that "Seven Hot Stocks for the Summer" feature. I mentioned earlier our Industry Focus. The point of that publication is to analyze and teach you Foolishly about America's key industries. While we do pick a stock to watch in each one, I'll be the first to tell you NOT TO LISTEN TO US. Not to listen just to us, anyway. Our efforts are based on getting you to listen to yourself.

To demonstrate my confidence in numerical and empirical research in the face of media speculation and rankings, I'll put out three strong buys and three strong sells to close tonight's report. These are on college basketball teams, though. Watch with me this season, and we'll learn together.

My STRONG BUYS are Marquette, Saint Louis, and Temple. At present neither Marquette nor Saint Louis is ranked by the polls, while in Sagarin's power ratings they stand #10 and #13 in the country, respectively. Temple is #17 in the polls, but the current power rating for Temple is #8. Our strong buys tonight from Gardner Basketball Investments Inc. suggest to us that both Marquette and Saint Louis are top 25 teams this year, and at least one of them will close the season in the top 20. Temple we would expect to finish higher in the end of season poll than its current standing.

Now, my STRONG SELLS: South Carolina, Iowa, and New Mexico. South Carolina is a top 10 team in the polls, with a power rating of #31. Iowa, #10 according to ESPN/USA Today, has a Sagarin power rating of #44. And New Mexico, the most overrated team in the country, sits #12 in the polls, with a power rating that suggests it is closer to the 100th best team in America.

At least two out of three of our strong sells will not place in the top 25 ratings at all by the end of the season.

Fool on!

-- David Gardner, December 8, 1997

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TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN +1 7/8 56.50 AOL +2 3/4 87.13 T + 7/16 57.81 CHV + 1/8 79.38 DJT --- 7.88 GM + 9/16 63.81 INVX +1 5/16 23.31 IOM -1 3/16 30.00 KLAC +1 3/16 41.56 LU + 15/16 81.94 MMM - 9/16 96.00 COMS +1 3/16 37.50

Day Month Year History FOOL +0.85% 3.64% 28.60% 243.20% S&P: -0.14% 2.82% 32.62% 114.30% NASDAQ: +1.08% 3.19% 27.92% 129.32% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 87.13 1097.94% 5/17/95 980 Iomega Cor 2.52 30.00 1090.48% 10/1/96 42 LucentTech 47.62 81.94 72.08% 8/11/95 125 Chevron 50.28 79.38 57.85% 9/9/97 290 Amazon.com 38.22 56.50 47.82% 8/12/96 110 Minn M&M 65.68 96.00 46.17% 8/12/96 130 AT&T 39.58 57.81 46.07% 8/12/96 280 Gen'l Moto 51.97 63.81 22.78% 4/30/97 -1170 *Trump* 8.47 7.88 7.01% 8/24/95 130 KLA-Tencor 44.71 41.56 -7.04% 6/26/97 325 Innovex 27.71 23.31 -15.87% 8/13/96 250 3Com Corp. 46.86 37.50 -19.97% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 30929.38 $28347.51 5/17/95 980 Iomega Cor 2509.60 29400.00 $26890.40 9/9/97 290 Amazon.com 11084.24 16385.00 $5300.76 8/11/95 125 Chevron 6285.61 9921.88 $3636.27 8/12/96 110 Minn M&M 7224.44 10560.00 $3335.56 8/12/96 280 Gen'l Moto 14552.49 17867.50 $3315.01 8/12/96 130 AT&T 5145.11 7515.63 $2370.52 10/1/96 42 LucentTech 1999.88 3441.38 $1441.50 4/30/97 -1170*Trump* -9908.50 -9213.75 $694.75 8/24/95 130 KLA-Tencor 5812.49 5403.13 -$409.37 6/26/97 325 Innovex 9005.62 7576.56 -$1429.06 8/13/96 250 3Com Corp. 11714.99 9375.00 -$2339.99 CASH $32438.81 TOTAL $171600.50








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.