<THE RULE MAKER PORTFOLIO>

Balancing Act: Take II

by Rob Landley (TMF Oak)

AUSTIN, TX (April 13, 1999) -- I'd like to begin today by bonking my editor (TMF Verve) over the head with a dead weasel.

Large chunks of yesterday's column bear remarkably little resemblance to what I wrote, and while I actually like our new editor personally, there's no way I'm letting him off the hook easier than when the illustrious Tom Gardner himself mangled a column of mine last year. Thankfully, Matt has yet to live up to Tom's example in that regard, but I still want to amend and extend the remarks that made it into print. Does this mean I'll start getting my columns in on time so Fool HQ doesn't have to edit them in such a hurry? Probably not. That's what the dead weasel is for.

Than again, part of this confusion honestly is my fault. Since I haven't watched CNBC or read The Wall Street Journal so far this year, I've forgotten that the term "value" has been co-opted by the mainstream media to mean "cash." Apparently, "This company has been creating a lot of value" now means its stock price has gone up. Any response to that on my part would have to involve this Doonesbury comic strip, which speaks for itself: Doonesbury for 3/28/99.

I'd bonk the mainstream media over the head with the dead weasel, but it's just not big enough. I'm not sure there is a weasel large enough to bonk the Wisdom out of that lot. At the very least, I'd have to deploy an industrial weasel, and I think the Environmental Protection Agency would object.

The problem here is Investmentitis -- the tendency to think of absolutely everything purely in terms of money. The point of yesterday's article (before editing, I mean,) was that money really ISN'T everything. Even when your objective is purely to make money, you can't just think in terms of money. To quote a line from the original article that didn't quite make it into print, "No amount of price cuts will make tuna dolphin-safe." If, for whatever reason, a company is not selling what the customer wants, then price may not be the problem.

While working toward that point, I wanted to say that successful companies are inherently good with money. Really good. Yet, several of them have "Investmentitis" because of it. "If you have a big enough hammer, everything looks like a nail." In order to talk about how good most successful companies are at dealing with money, I mentioned the Law of Supply and Demand, which is basically just saying that the more of something there is for sale, the less people are willing to pay for any of it.

For example, one "Mona Lisa" is priceless, but a whole truck full of "Mona Lisas" is cheap. OPEC, the DeBeers diamond company, and half of the world's agricultural policy are all based on keeping the price of something high by restricting supply, and ultimately winding up with more money than if they just flooded the market with all they could make. Corporations understand this instinctively: it's money. They're good at money. I may have mentioned that.

The "value" customers receive when they buy a product usually is NOT money. They like the taste of the cereal, they're impressed by the brand name of the blue jeans, they think the color of that couch would match the drapes beautifully. Yes, as investors we're trying to buy money, but that's an exception to the rule. Everywhere else, money is what customers give up in exchange for the value they perceive in the product they'd like to buy. The two qualities are actually antithetical, and in any given transaction they mostly cancel each other out. "I give you money, you give me valuable stuff, we're even." The more value the product has to the customer, the more money is required to balance out the transaction.

Companies inherently know about the money, but must work hard to understand the "value" part of the of the "valuable stuff" that attracts all those "crazy customers." And ultimately, after millions of dollars are spent on focus groups and strategy meetings, this understanding exists in the minds of individual managers who, on a personal level, may have once met somebody who actually tried to use the product.

Tomorrow, I'll talk about what happens when a company loses sight of its product's value to customers and instead focuses solely on thoughts about money. The results, like yesterday's column, could require the deployment of a really large weasel.

This evening, Intel (Nasdaq: INTC) reports Q1 '99 earnings. The Zack's estimate of 30 "Sales Associates" calls for $0.54, up from the year-ago quarter's $0.41, but down from last quarter's $0.60. The announcement will be broadcast live at Intel's investor relations website.

- TMFOak

04/13/99 Close

Stock  Change    Bid
AXP   +7 1/16  135.44
CHV   +1 1/2   95.50
CSCO  -  3/8   117.75
KO    +1 1/8   61.88
GPS   +1 15/16 76.63
EK    +  1/16  63.00
XON   +  3/4   75.44
GM    +2 1/2   88.13
INTC  -4 11/71 61.25
MSFT  -1 1/4   93.00
PFE   +4 1/8   150.13
SGP   +  15/16 60.75
TROW  -  7/16  32.13
YHOO  -4 1/16  202.94

                    Day   Month    Year  History
        R-MAKER  +0.36%   7.32%  19.54%  51.25%
        S&P:     +0.76%   5.62%  10.85%  37.10%
        NASDAQ:  +0.22%   5.57%  18.52%  57.23%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     93.00   137.64%
    5/1/98   55 Gap Inc.      34.37     76.63   122.94%
   6/23/98   34 Cisco Syst    58.41    117.75   101.59%
    2/3/98   22 Pfizer        82.30    150.13    82.41%
   2/17/99   16 Yahoo Inc.   126.31    202.94    60.67%
   2/13/98   44 Intel         42.34     61.25    44.67%
   5/26/98   18 AmExpress    104.07    135.44    30.14%
   8/21/98   44 Schering-P    47.99     60.75    26.58%
    2/6/98   56 T. Rowe Pr    33.67     32.13    -4.60%
   2/27/98   27 Coca-Cola     69.11     61.88   -10.46%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     88.13    21.71%
   3/12/98   20 Exxon         64.34     75.44    17.26%
   3/12/98   15 Chevron       83.34     95.50    14.59%
   3/12/98   20 Eastman Ko    63.15     63.00    -0.23%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4464.00  $2585.55
    5/1/98   55 Gap Inc.    1890.33   4214.38  $2324.05
   6/23/98   34 Cisco Syst  1985.95   4003.50  $2017.55
    2/3/98   22 Pfizer      1810.58   3302.75  $1492.17
   2/17/99   16 Yahoo Inc.  2020.95   3247.00  $1226.05
   2/13/98   44 Intel       1862.83   2695.00   $832.17
   5/26/98   18 AmExpress   1873.20   2437.88   $564.68
   8/21/98   44 Schering-P   2111.7   2673.00   $561.30
    2/6/98   56 T. Rowe Pr  1885.70   1799.00   -$86.70
   2/27/98   27 Coca-Cola   1865.89   1670.63  -$195.27

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1498.13   $267.24
   3/12/98   20 Exxon       1286.70   1508.75   $222.05
   3/12/98   15 Chevron     1250.14   1432.50   $182.36
   3/12/98   20 Eastman Ko  1262.95   1260.00    -$2.95

                              CASH    $185.03
                             TOTAL  $36391.53

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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