Rule Breaker Portfolio

An Age of Understanding
...with the foundation placed in 1962
by Jonathan Smith
(jsmith@jonathansmith.com)

GREENSBORO, NC (July 9, 1998) -- I started in the stock business as a broker 22 years ago. My good fortune included serving some pretty wonderful clients, teachers really. By 1981, launching an investment partnership was within reach, and so doing, I spent the next dozen years owning far too many wonderful companies, for way too short a time.

Years later, I would stumble on to George S. Clason's 1926 classic, The Richest Man in Babylon, and discover the Foolish truth that when youth comes to age for advice, he receives the vision of years. Looking back, I must have thought Warren Buffett was too narrow in thinking that one should limit himself to making a maximum of 20 investment decisions over a lifetime. Now, I see the value of treating each purchase as you would a punch on your meal ticket.

In 1988, I founded an investment advisory business, making our investment services public. I've made it a priority to focus our resources (and attention) narrowly, mostly on Cash-King companies, a few Fool Port names, and recently, a healthy dose of Berkshire Hathaway (NYSE: BRK.A). I look for truly exceptional visionary businesses, the best of the best, premier institutions in their fields, run by persons of integrity, widely admired by knowledgeable business people, making an indelible imprint on the world, having multiple generations of chief executives, whose products are repeatedly sought after. I often say that time is the friend of the wonderful business, and the enemy of the mediocre. I try to remember that luck favors the persistent.

I have the best job in the world: I like my work, I like the other people I work with, and I like the folks we serve. You know, in life, you pretty much find what you are looking for, whether you are looking for happiness, health, prosperity, security, friends, peace of mind, or good family relationships, or hope. Fools, we have so many reasons to be overwhelmingly grateful for our many blessings.

On this very day in 1962 --

Cape Canaveral launched Telstar into outer space. Telstar, the famous communications satellite, would usher in a new age of communication via telephone and TV, with voice and picture transmission from Europe to America and back. Just a matter of time before the Internet would become an instrument of profound change, allowing millions of individuals to access data, voice, and video as if in one gigantic classroom.

And a relatively obscure Torrance Jones launched a letter to each of his three sons, announcing the gift of 60 shares of Standard Oil of N.J. to each of his seven grandchildren. A gift totaling $1,163.40 in 1962.

"What's the point?" you ask. How's this? Jones never made it to college, much less high school. His schooling stopped the day he left grade school, but his education never ended. Jones supported his family sweeping floors in a Standard Oil distributorship, a career path that would eventually lead to becoming assistant division manager. His daughter-in-law, with grandchildren of her own, fondly recalls, "He became a self-educated man, he read constantly. You would have never known he was not an educated man." I wonder what he read.

When the War broke out, Jones shifted his attention to serving his country. Standard Oil kept his job open. On returning, he reapplied a discipline and maturity that would never let him down. He married and raised three sons. His daughter-in-law continues -- "He was a Methodist, always in his Sunday school class, always providing for his family. One day we received a letter from him saying he had given 60 shares of Standard Oil of N.J. to each of his grandchildren (our daughters, and to their cousins). Not only were we able to send our two daughters to college, but there's money left over to send two grandsons as well!"

Being a man who both learned and observed the laws that governed the building of wealth, Jones shared his vision with his grandchildren through the handful of Exxon stubs he invested for their future. His letter from 1962 is at the end of this piece, but there's more...

Thirteen weeks after Jones made his gifts, the Cuban Missile Crisis, the worst superpower confrontation and the closest the U.S. and the Soviet Union ever came to a nuclear war, began. The panic unfolded when a U-2 reconnaissance aircraft returned with photographs of Soviet nuclear missiles near the town of San Cristobel, Cuba, capable of reaching � way into the United States, and capable of capsizing many an unsure investment strategy, but not Jones'.

Would the investment have stood the winds and storms of time had Jones not had the foresight to lash down those Standard Oil shares with vision and purpose before he gave them away? I don't think so. What causes 80% of American households to turn their stock holdings over every 12 months, or the NASDAQ to turn over twice a year? Sometimes I wonder if electronic stock trading and discount commissions almost makes it too easy for stockowners to abandon their initial purposes.

Consider Peter Lynch's claim that most of the owners of Fidelity Magellan lost money, even though, during his 13-year tenure, the fund earned 29% compounded annually. As these columns steadfastly proclaim, only time, Fool, will make you an successful investor, not great investment returns. Next time the Dow swoons 450 points or the NASDAQ loses 85 points, re-read the Barber-Odean study on portfolio turnover. Resolve to become an investor for life, not a dabbler for the moment. Don't let those 1962 missiles shake the rivets out of your otherwise perfectly good long-term investment strategy.

Next time you make a gift of stock to your children or grandchildren, or even buy an investment for yourself, contemplate the Foolishness of Algamash's admonition to Arkad (The Richest Man in Babylon) "that learning is of two kinds: the one kind being in the things we learned and knew, and the other being in the training that taught us how to find out what we do not know." Think about writing a cover letter, maybe like the one Jones wrote, maybe even to yourself. Hold a sufficiently strong conviction to lash down any investment worth owning for the first 36 years, so that it will make it for the next 36.

I've had many joys over my career. One of them has been keeping a hand on the tiller and an eye on the compass, steering the course Jones set 36 years ago.

The letter he wrote this day in 1962 is behind this link.

Fool on,

Jonathan Smith

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Bookmark Live Fool Port Quotes

07/09/98 Close
Stock Change Bid ---------------- AMZN -1 15/16 105.13 AOL +4 3/4 113.63 T + 7/16 57.50 DJT + 1/8 7.56 DD - 7 70.13 XON -1 7/16 71.75 INVX - 7/8 14.75 IP - 3/8 43.38 IOM --- 5.88 KLAC -1 3/16 26.38 LU - 9/16 86.63 SBUX + 11/16 57.75 COMS + 1/8 29.63 TDFX - 3/16 16.63

Day Month Year History Annualized FOOL -0.04% 3.71% 48.00% 396.69% 50.42% S&P: -0.67% 2.18% 19.39% 152.74% 26.64% NASDAQ: +0.23% 2.38% 23.53% 169.35% 28.71% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 113.63 3024.62% 9/9/97 580 Amazon.com 19.11 105.13 450.08% 5/17/95 1960 Iomega Cor 1.28 5.88 358.84% 10/1/96 84 LucentTech 23.81 86.63 263.85% 8/12/96 130 AT&T 39.58 57.50 45.28% 2/20/98 215 DuPont 59.83 70.13 17.20% 2/20/98 200 Exxon 64.09 71.75 11.95% 4/30/97 -1170*Trump* 8.47 7.56 10.70% 7/2/98 235 Starbucks 55.91 57.75 3.29% 2/20/98 270 Int'l Pape 47.69 43.38 -9.05% 1/8/98 425 3Dfx 25.67 16.63 -35.23% 8/13/96 250 3Com Corp. 46.86 29.63 -36.79% 8/24/95 130 KLA-Tencor 44.71 26.38 -41.01% 6/26/97 325 Innovex 27.71 14.75 -46.77% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 80673.75 $78091.88 9/9/97 580 Amazon.com 11084.24 60972.50 $49888.26 5/17/95 1960 Iomega Cor 2509.60 11515.00 $9005.40 10/1/96 84 LucentTech 1999.88 7276.50 $5276.62 8/12/96 130 AT&T 5145.11 7475.00 $2329.89 2/20/98 215 DuPont 12864.25 15076.88 $2212.63 2/20/98 200 Exxon 12818.00 14350.00 $1532.00 4/30/97 -1170*Trump* -9908.50 -8848.13 $1060.38 7/2/98 235 Starbucks 13138.63 13571.25 $432.63 2/20/98 270 Int'l Pape 12876.75 11711.25 -$1165.50 8/24/95 130 KLA-Tencor 5812.49 3428.75 -$2383.74 1/8/98 425 3Dfx 10908.63 7065.63 -$3843.00 6/26/97 325 Innovex 9005.62 4793.75 -$4211.87 8/13/96 250 3Com Corp. 11715.99 7406.25 -$4309.74 CASH $11876.47 TOTAL $248344.84

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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.