Rule Breaker Portfolio

FOOL PORTFOLIO REPORT
(FOOL GLOBAL WIRE -- Monday, December 29, 1997)
by David Gardner (DavidG@Fool.com)

ALEXANDRIA, VA (Dec. 29, 1997) -- On a strong market day the Fool Portfolio struggled, still rising more than a percentage point, but unable to stay with the market averages. Picture the S&P 500 and the Nasdaq as broncos, then picture a floppy-capped Fool trying to hold the reins as he attempts to ride BOTH... and gets bucked. Fool up 1.2%, with the S&P and Nasdaq up 1.8% and 1.7%, respectively.

Let's see what the Wise had to say today:

"U.S. stocks jumped on Monday in a broad rally amid improved sentiment regarding the Asian financial crisis, allowing a traditional year-end rally," Reuters explains.

Ah, of course. Yes, yes. That ever-changing sentiment over the Asian thing. Must be it.

Says the portfolio strategist for Salomon Smith Barney (geez, do you remember when this was actually two firms?) (just can't keep up with all these consolidations) (what's next... Salomon Smith Barney Schwab NationsBank?), "For the moment [italics mine], people feel better about overseas markets, and it's that time of year when selling pressure comes off."

I guess that'd just be this moment, right? Just today. What they thought last Friday or what they'll think tomorrow can be totally different.

Y'know, these explanations of why the market did what it did never fail to amuse me. That said, I don't think human nature will ever fail not to try to explain it. I do know one thing, however... no matter what, the media will never fail to quote people about it!

Anyway, we had ZERO news on our companies. Nada, zippo, zilcherilla. Three bucks up for Amazon here, AT&T drops a sixteenth there, the Donald gambles away another $3/16... typical deal.

Did you know in Trump's new book that he actually has the gall to say that one of his great regrets is that he never got to date Princess Diana, as he thinks he could have made her happy?

I look at Amazon.com's listing of Trump books, and as for every book purchased in respectable volume at that site, it shows the three other books purchased most often by people who purchased Trump's book: The Wealthy 100, Howard Hughes: The Untold Story, and The Difference Between God and Larry Ellison: Inside Oracle Corporation.

Funny, but nowhere there did I see listed, "Shares of DJT."

Indeed, the more you learn about this man, the more you may appreciate the God-given market opportunity to borrow someone else's shares and sell them. (More about that at Step Eleven in the Fool's School.)

Now let us stagger onward toward the primary news of the day....

In one of our own two new books (both just out!), You Have More Than You Think (I'm thinking Donald's next book may be titled, I Have More Than You Thought), we make a slight revision to our Foolish Four approach. We are officially changing the strategy to conform with Robert Sheard's long-existing modification, which he calls the "UV4."

For many Foolish Four adherents, this is old hat, but let me explain the change for those for whom this is news.

The modification is indeed slight. Previously, we have always gone on to kick out the lowest-priced stock automatically, then double up on the second stock (2-2-3-4-5) of the ten Dow dogs. Robert has pointed out two things: (1) the lowest-priced stock has done dramatically worse than the rest in years in which it also had the highest dividend yield, but (2) in years in which that was not the case, you did slightly better by including this lowest-priced stock.

So the new Foolish Four (UV4) approach simply has you looking at the ten Dow dogs (highest yielders), and immediately eliminating the one at the top of the list (highest yielder) if it has the lowest price. After having done this (if necessary), you then just go on to buy the top four on the remaining list of ten or nine. This means that in some years you will end up buying the #1 poll position stock, whereas before we always kicked it out.

One other thing: We actually tend to recommend you just make your purchase with four equal dollar amounts, not doubling up... but really, if you still want to load up on that top one you can. It's like choosing between Babe Ruth and Hank Aaron, as over the long term you can't really go too wrong either way. We tend not to suggest doubling up going forward because the numbers (now backtested to 1961) don't improve that much, and you add in more risk by loading up on just one of four.

That works great with a stock like AT&T (which was the double-up stock for 1997, and also the top performer among all Dow stocks with a 53% return this year). But as Robert points out in today's Daily Dow report, if you'd purchased International Paper (which became the double-up, or PPP, stock just a few days later), you'd have doubled up on a stock that only rose 7% this year.

This is all to say, once again, that each of these approaches has merit, and I definitely don't want anyone to think that our original 2-2-3-4-5 approach doesn't work. It works very nicely, thank you, and has been a trusty steed once again this year. But for future uses of the Foolish Four with our own money, we'll be putting this new slightly modified approach to work for us here in the Fool Portfolio, and in the Foolish Four area (the change for the New Year is about to occur, there).

The details and the new system are in both You Have More Than You Think and also the new Motley Fool Investment Workbook, our interactive learning tutorial (a standalone book) that has you rolling up your sleeves and getting out your pencil as you scratch through our quizzes and jokes on your way to financial independence. We wrote this book because we got so many e-mails from people wanting us to check their math as they did their first Fool Ratio; we figured we'd just create a workbook to give them a bunch of opportunities to quiz themselves!

Finally, early on in You Have More Than You Think we particularly focus on investment strategies for those just starting out. You'll see there that we suggest that as you build your portfolio, you might just buy a few of the Foolish Four stocks, rather than the whole-hog approach. This gets across our basic attitude about the approach, which is that you don't have to get too hung up on being completely air-tight-accurate on the mechanics of the approach. You can buy a few, or modify the thing in any other ways you see fit. Hey, the idea here is just to buy some good downtrodden stocks that will outperform the market.

Cool?

Fool on!

-- David Gardner, December 29, 1997

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TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN +3 1/8 57.00 AOL - 5/16 86.63 T - 1/16 63.00 CHV +2 3/16 77.50 DJT - 3/16 6.75 GM + 1/2 59.81 INVX + 3/16 20.38 IOM + 1/16 12.38 KLAC + 1/8 38.56 LU +2 11/16 80.31 MMM - 9/16 83.00 RTN.A - 1/8 48.81 COMS +1 1/16 34.31

Day Month Year History FOOL +1.19% -0.77% 23.12% 228.59% S&P: +1.80% -0.21% 28.70% 107.98% NASDAQ: +1.72% -3.94% 19.09% 113.48% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 86.63 1091.07% 5/17/95 1960 Iomega Cor 1.28 12.38 866.49% 10/1/96 42 LucentTech 47.62 80.31 68.67% 8/12/96 130 AT&T 39.58 63.00 59.18% 8/11/95 125 Chevron 50.28 77.50 54.12% 9/9/97 290 Amazon.com 38.22 57.00 49.13% 8/12/96 110 Minn M&M 65.68 83.00 26.38% 4/30/97 -1170 *Trump* 8.47 6.75 20.30% 8/12/96 280 Gen'l Moto 51.97 59.81 15.08% 12/19/97 17Raytheon 53.21 48.81 -8.26% 8/24/95 130 KLA-Tencor 44.71 38.56 -13.75% 6/26/97 325 Innovex 27.71 20.38 -26.47% 8/13/96 250 3Com Corp. 46.86 34.31 -26.78% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 30751.88 $28170.01 5/17/95 1960 Iomega Cor 2509.60 24255.00 $21745.40 9/9/97 290 Amazon.com 11084.24 16530.00 $5445.76 8/11/95 125 Chevron 6285.61 9687.50 $3401.89 8/12/96 130 AT&T 5145.11 8190.00 $3044.89 8/12/96 280 Gen'l Moto 14552.49 16747.50 $2195.01 4/30/97 -1170*Trump* -9908.50 -7897.50 $2011.00 8/12/96 110 Minn M&M 7224.44 9130.00 $1905.56 10/1/96 42 LucentTech 1999.88 3373.13 $1373.25 12/19/97 17Raytheon 904.57 829.81 -$74.76 8/24/95 130 KLA-Tencor 5812.49 5013.13 -$799.37 6/26/97 325 Innovex 9005.62 6621.88 -$2383.75 8/13/96 250 3Com Corp. 11715.99 8578.13 -$3137.87 CASH $32484.33 TOTAL $164294.77








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.