Post of the Day
December 21, 1999

Board Name:
CMGI, Inc.

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.

Subject:  Rule Breaker port says bye IOM
Author:  IFindKarma

[Note: A post unrelated to this thread, but related to this subject, may be found on the Rule Breaker - Strategies board. It provides David Gardner's perspective.]


de-lurking to rant on something off-topic that has bugged me all year...

mcnulty and Chris and CurveRider, thanks for those great summaries of the annual shareholder meeting. Hopefully this time next year I won't be so busy with work, so I can attend too! And mcnulty, thanks for posting your insights on Raging Bull, a company that we CMGI shareholders each own part of. Kudos to you for supporting the mother ship.

The reason I'm briefly de-lurking is that Rimpinths forwarded me TMFJeff's lovely little writeup of the Rule Breaker Portfolio's sale of IOM and TDFX...

I happen to agree with Rimpinths that the reason the Rule Breaker portfolio ended its love affair with Iomega, a stock it once loved like there was no tomorrow, is that it stopped going up. Recall that in January of this year, David Gardner bet a bottle of wine that Iomega would be the stock of the year:

To quote that article: "Iomega has new products, a new and respected management, some fresh Wall Street coverage, and it remains just far enough off Wall Street's radar that it might do very well in 1999."

Not even a year later, they sold IOM. Because it stopped going up. [3dfx, on the other hand, never went up, so the Rule Breaker Portfolio ended its love affair with that company too.]

You might recall on the "Rule Breaker Strategies" board as far back as I can remember that people repeatedly asked the Rule Breaker Portfolio to sell IOM and TDFX all year. But as far back as I can remember, they've gone out of their way to extol the virtues of Iomega. Ah, Iomega!

To quote: "Iomega has a powerful online following among individual investors. Still, that's an amazing response and really gives the lie to the notion bandied about by even some large tech companies that there isn't demand for webcasts of conference calls. We have to salute Iomega for helping to lead the way."

So what happened? The stock continued to do what it has been doing since 1996 -- it went down some more. Now the Rule Breaker Portfolio has sold great companies like The Gap, 3Com, and KLA-Tencor -- kicking them out of its portfolio way too early. But throughout Iomega's poor performance, the Rule Breaker portfolio held fast to its claim that they were in it for the long haul, and that short term stock price movements mattered not to a principled Long Term Buy and Holder. And then the stock went down some more.

By mid June, even the Rule Breaker portfolio was beginning to have its doubts...

To quote: "There's no doubt that the once-mighty Iomega has some major problems at this point. Where the company once represented over half of this portfolio's value back in 1996, the Iomega shares now compromise only 1.2% of the Rule Breaker's assets. Even if Iomega were to get chopped in half again (a sad but distinct possibility), it wouldn't even move the portfolio a whole percentage point. This won't be the last you will hear about Iomega, for there are plenty of lessons to be learned by the Rule Breaker's mistake of holding on to the company too long."

So by September with IOM and TDFX performing miserably on the year, it should come as no surprise that the Rule Breaker Portfolio declared them to no longer be rule breakers:

To quote TMFJeff: "Iomega and 3dfx have unexpectedly fallen from profitability to net losses. A company becoming a Rule Maker does the opposite: It becomes more and more profitable." [Amazon fits this category???]

So be it. The stock went down more, and in comes the words of capitulation: "Voodoo 3D cards and Zip drives are the best-selling products in their niche, but does that make 3dfx and Iomega Rule Breakers? No."

With the love affair over, TMFEdible throws a suckerpunch:

To quote Edible: "Iomega (NYSE: IOM) and 3Dfx (Nasdaq: TDFX) are still residents here even though fundamentals should be ringing the bellhop to let them know that they have clearly overstayed their welcome. This is not Hotel California. This is not a roach motel. Pack your bags and go already. Beds need to be made and chocolates need to be left pillowside for new arrivals."

Then TMFJeff taught us about the art of window dressing:

To quote TMFJeff: "Imagine that you owned 3Com for the past year. Imagine you sold 3Com and bought Amazon on September 30. A friend calls on October 1: "What do you own, my buddy? How is your portfolio doing?" You answer, "I own Amazon. Yup." Your friend is impressed. ...they sell the losers (erase their tracks) and buy the recent winners..."

So, with the end of the year closing in, it was time for the Rule Breaker to sell its losers (erase their tracks) and buy a recent winner. Imagine that you owned Iomega and 3dfx for the past year. Imagine you sold them and bought Celera, a biotech. New Fools come to the site, looking up what the ever-impressive Rule Breaker Portfolio owns. "I own CRA. Yup." The new Fool is impressed.

Want to be even more impressed? As soon as the Rule Breaker Portfolio announced they were buying CRA, the stock jumped from 79 to 94 the very next day. Of course, the Rule Breaker Portfolio happened to snag it at the low of the day:

To quote TMFJeff: "Celera's stock traded between $79 and $94 today, before ending around $87, a new closing high, up 14% on the day. We scoured the wires for news releases to try to account for the jump, but we couldn't find anything. The stock traded six times its normal volume (well over $100 million worth). Without news, that's strange. We would suggest that Fools were buying the stock on our lead, but that would mean that a lot of Fools did a lot of research all night to come to understand the company so quickly before buying it, and that seems a tall order in 12 hours."

Gee, I wonder if someone would be so Foolish as to buy something just because the Rule Breaker Portfolio announced they were gonna. Naw... no one would want market crushing returns, so why would they mimic the savvy Rule Breaker Port managers?

It's not like The Motley Fool adding ARMHY to the NOW 50 had anything to do with that stock jumping 32 points the day the addition was announced. Wait, bad example.

But don't worry about the Rule Breaker Portfolio plunking down $50,000 on CRA. Because they are in it for the long haul.

To quote TMFJeff: "Good stocks can rise indefinitely, overall, over the long, long term. "But won't we see a two-, or three-, or five-year respite -- or perhaps a sharp decline -- soon, and now and again?" Certainly, yes, sometime we will. That's why we're prepared, as always, to stay invested no matter what stocks do in the near term, because the real benefit of stock ownership can only be derived from long-term ownership."

Long term ownership. Um, yeah. As Iomega and 3dfx are swept into the dustbin occupied by The Gap, 3Com, KLA Tencor, and a dozen other stocks they no longer talk about in Rule Breaker Portfolioland, we have to remember to stay in it for the long term. Because that's where the real benefits of stock ownership can only be derived. Or something.

The Fool has taught us a valuable lesson with its handling of Iomega. For that, I am grateful. Fool School really is valuable. There are lessons in everything if only we are willing to think.

Happy holidays, everyone! Here's to a nice Christmas rally and January effect for CMGI and all the other stocks we own!

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