Rule Breaker Portfolio

No Sorry!

A guide to surviving the present volatility

by David Gardner

ALEXANDRIA, VA (Aug. 31, 1998) -- My four-year-old daughter has a nasty habit right now of gritting her teeth and running up to her two-year-old brother in order to yank his nose or poke him in the eye. You know, just for the heck of it. This makes her somewhat "high maintenance" -- my wife and I rarely leave the two alone (and consequently, they rarely leave the two of us alone). Of course, we always make a point of sitting her down and telling her that this is wrong, and getting her to apologize. Which she does. But these scenes repeat themselves frequently enough that my son is no longer satisfied by her apologies. Would you be?

"Sorry, Gabe," my daughter says.

"No sorry!" says Gabe.

He's angry. Having your eye poked time and again by your older sister, only to receive a short apology after each episode, is inherently unsatisfying. No justice. "No sorry!" says Gabe, his baby-smooth face screwed up angrily, looking like he's been robbed or defrauded.

You might be feeling the same way about your investment portfolio right now. Here's how ours has done in the past five days:

-0.56%
-1.47%
-5.07%
-6.73%
-12.64%

A little worse each day, with three humdingers in a row culminating with today, the worst day in Fool Port history, bidding adieu to 12.64% of our net worth in just a few lousy sunlight hours. This simply doesn't happen very often....

"No sorry!" one wants to say to Mr. Market. It seems unjust, doesn't it?

And yet there's every bit of justice in it... or none at all. There's every bit because this brief, steep drop has only just today plunged the indices in negative territory for the year. And that comes after the three best consecutive years in market history. That's three incredible years followed by one year in which, at present, the S&P 500 is off a lousy 1.33%. Sorry, but there's every bit of justice in that. Are you spoiled? Unspoil yourself.

On the other hand, there's no justice in it. What has changed so much about the world today that makes it that much different from a week ago? A week ago, our portfolio was up 52% for the year. Today, as the smoke clears, we find our gains just 15%. (And we're the lucky ones! We've always acknowledged luck as a key element in our performance. Many people with less luck are not up right now, but down. But so's the market, so if this is you, don't sweat it.) Anyway, that's 37 percentage points of winning that's evaporated before our eyes, in between paychecks. The very stocks that have helped us most to our stellar returns, America Online and Amazon.com, were the ones that hurt the most today, AOL down $14 and Amazon $22.

No sorry!

We always ask: Why did you buy in the first place? With money we won't need for at least five years (preferably five decades), we invested in stocks for the long term. So when we go back and reexamine our reasoning, we find it completely unchanged. Stocks have been the best investment over this century, and we expect the same to be the case for the next century. That's even DESPITE all the days like today, which are always unusual, but never so unusual that they don't recur every several years. Even DESPITE days like today, or months like this month (now mercifully ended), stocks are the best long-term investment. Our original reasoning for investing is therefore unchanged: is yours? These are the questions that help you answer how you should treat days like today.

OK, so if the market dropped another 20% tomorrow, does that put you out? If you've been listening to The Motley Fool, it should not. You're putting money away that you won't need anytime soon, you are NOT on margin in any significant way, and you probably like your companies just as much as you did yesterday, even if the broad market has now devalued them. You're looking forward to that next paycheck, because you'll still be socking away 5%-10% of that into your 401(k) or IRA or brokerage account, at a substantially cheaper price. That's Foolish.

That's not to say that we at Fool HQ or anyone treats significant drops with blithe indifference. Psychologists tell us that the pain of loss is three times the joy of gain. Look again at our last five days. OUCH! But for anyone who's living the Foolish long-term investment approach, it's very very hard to have shown any losses. Take the index fund, which is one of the first steps to investing Foolishly. The ONLY long-term index-fund investors who are presently down are the ones who put their first invested money into the market during the past several weeks. Those are the ONLY long-term investors in index funds who are down. I certainly pity these people, as it's hard to start your first days as an investor in the face of a 20% drop. And yet my pity doesn't run too deep, because if they're investing Foolishly they're concentrated on years and decades, not today or last month.

Indeed, if strong American technology and consumer companies -- which every day get a bit closer to dominating the world economy -- don't do well over the next 25 years, nothing much will. I'm cool with that. I can't predict where it'll all go over any period, but I do know that I'm invested about as best I can right now. There aren't many companies with better prospects right now than America Online, I think. That's why I don't mind it being my biggest holding, or accounting for about 25% of this portfolio's weighting. (It got there for the right reasons -- and it remains a major reason why we're still up 15% for 1998.)

To close, every discretionary dollar I have is invested in the stock market, as true of today as it will be for tomorrow as it was for yesterday. I've invested for 15 years, and over that time the stock market has rewarded American equities investors very well. More importantly, our collective knowledge of market history runs far longer than 15 years, so that we can all see how rewarding stocks can be when held over a lifetime. Thus, I plan to remain invested in most of the same companies -- the very ones you see in this portfolio -- for at least the next 15 as well. And yet these gains have not come without suffering! The stock market dropped 23% on a day in 1987 that I remember pretty well, and just several months ago, in October of 1997, the Dow dropped 7.2%... a measure worse than today's S&P 500. And that was only last fall.

If you come to this space to be reminded of these things, then I'm glad I'm able to help you out. But do consider that if you're having to come to this space to remind yourself of these things, you're not yet as self-sufficient an investor as we think you should be. We're here to help, whether it's through our Fool's School area, through our message boards, or scribblings like this one. We're here to teach, and (as usual) we learn more than we teach. It's as true of investing as it is of parenting.

No sorry!

Foolishly,

David Gardner, August 31, 1998

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Bookmark Live Fool Port Quotes

08/31/98 Close
Stock Change Bid ---------------- AMZN -22 9/64 83.75 AOL -14 1/2 81.50 T -5 5/16 50.50 DJT - 5/8 3.06 DD - 7/16 57.63 XON -2 3/16 65.44 INVX -1 1/8 10.38 IP -2 37.00 IOM - 1/4 3.63 KLAC -3 1/2 21.25 LU -10 1/4 70.75 SBUX -1 1/8 31.56 COMS -2 3/8 23.69 TDFX -1 3/4 9.13

Day Month Year History Annualized FOOL -12.64% -21.73% 15.12% 286.33% 39.37% S&P: -6.78% -14.56% -1.33% 108.89% 19.83% NASDAQ: -8.57% -19.93% -4.53% 108.17% 19.73% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 81.50 2141.21% 9/9/97 580 Amazon.com 19.11 83.75 338.23% 10/1/96 84 LucentTech 23.81 70.75 197.17% 5/17/95 1960 Iomega Cor 1.28 3.63 183.11% 4/30/97 -1170*Trump* 8.47 3.06 63.84% 8/12/96 130 AT&T 39.58 50.50 27.60% 2/20/98 200 Exxon 64.09 65.44 2.10% 2/20/98 215 DuPont 59.83 57.63 -3.69% 2/20/98 270 Int'l Pape 47.69 37.00 -22.42% 7/2/98 235 Starbucks 55.91 31.56 -43.55% 8/13/96 250 3Com Corp. 46.86 23.69 -49.45% 8/24/95 130 KLA-Tencor 44.71 21.25 -52.47% 6/26/97 325 Innovex 27.71 10.38 -62.56% 1/8/98 425 3Dfx 25.67 9.13 -64.45% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 57865.00 $55283.13 9/9/97 580 Amazon.com 11084.24 48575.00 $37490.76 4/30/97 -1170*Trump* -9908.50 -3583.13 $6325.38 5/17/95 1960 Iomega Cor 2509.60 7105.00 $4595.40 10/1/96 84 LucentTech 1999.88 5943.00 $3943.12 8/12/96 130 AT&T 5145.11 6565.00 $1419.89 2/20/98 200 Exxon 12818.00 13087.50 $269.50 2/20/98 215 DuPont 12864.25 12389.38 -$474.88 2/20/98 270 Int'l Pape 12876.75 9990.00 -$2886.75 8/24/95 130 KLA-Tencor 5812.49 2762.50 -$3049.99 6/26/97 325 Innovex 9005.62 3371.88 -$5633.75 7/2/98 235 Starbucks 13138.63 7417.19 -$5721.44 8/13/96 250 3Com Corp. 11715.99 5921.88 -$5794.12 1/8/98 425 3Dfx 10908.63 3878.13 -$7030.50 CASH $11876.47 TOTAL $193164.78








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.