Rule Breaker Portfolio

Ring That Bell
Or Keep Me In The Market

by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Oct. 7, 1998) -- The market got munched today, another one of those volatile bad days that have been fast and frequent for the past few months. Munch munch munch munch munch. Munch. (Belch.) The Fool Portfolio surrendered 6.32% of its value. The Nasdaq did better, only suffering a drop of 3.19%. The S&P 500 did a wee bit better, dropping 1.41%.

If you were an equities investor, you kinda hadda almost definitely lose money today -- so little to cheer for, long. If you are mainly short, you had some fun, more of same since late July. If you want to learn more about shorting stocks, one of the bedrocks of The Foolish Approach (suitable only for experienced and aggressive investors), you should report directly to that section of the Fool's School by clicking here. We also have a good message board dedicated to Shorting Stocks on the Web, which has been quite active as of late. For that, click (and bookmark) here.

The Nasdaq is now down 27% from its July high. Markets typically overshoot to the upside and overshoot to the downside. Most of us get too excited when stocks are at their top and keep buying, and we get too disappointed when stocks are at their bottom and keep selling. Consequently, the market always overshoots. Have we overshot downwards yet? Who knows?! Don't expect any pontifications about market timing or market predictions in this space each day -- or at fool.com overall. Why? We simply don't believe anyone can do so successfully...

... Peter Lynch sounded this point pretty eloquently a few weeks ago on CNBC. I'll paraphrase his words:

"If somebody would please ring a loud bell whenever we hit a market top, I'd really appreciate it. And if somebody would then ring that same bell whenever we hit a market bottom, I'll need that too. Until somebody does this, I'll continue just to buy and hold as an investor, confident that it isn't worth it to try to 'time' the market because it isn't possible for me to do so successfully."

Whether you agree with Lynch (one of the world's great investors) or not, what's clear is that his words ring true for many people who simply do not have -- or want to spend -- the time to follow the market's zigs and zags. I include myself in this group. We will almost always miss avoiding the drops, but we accept this. If in one year you gain 60%, then lose 30% of that, before you gain back 20% -- do you know where you end up? Up 34.4% for that year. That's a great year. During the 30% drop -- which takes you from a return of 60% to a return of just 12% -- you feel some pain. But if you condition yourself to not to care too much you wind up eventually up 34.4% and a very happy investor. How do you condition yourself "not to care too much"? The answer is simple. One phrase:

TIME HORIZON.

Buy-and-hold investing is best practiced by those who are planning on doing it for a minimum of five years, but preferably five decades.

Amazon.com (Nasdaq: AMZN) suffered nearly a $15 drop today along with weakness in a lot of Internet stocks (Yahoo! down $10, Sportsline USA down $9, AOL down $6, etc.). In Amazon's case, the market may be reacting to a combination of Bertlesmann investing in barnesandnoble.com, while music rivals CDNow and N2K are considering merging.

Bertlesmann will pay $200 million for 50% of Barnes & Noble's (NYSE: BKS) online operation, which itself had a total of $22 million sales in its present fiscal year's first two quarters. For one of the largest media companies in the world to spend that much for that little looks like an incredible endorsement of Amazon's own standing in its industry and the business world overall. (Amazon has over $200 million in sales over that same six-month period.)

You won't find much valuation talk in this column about Amazon or any other Internet stock, simply because we find it as difficult to value as anyone else. The reason we own Amazon.com in the Fool Portfolio is that we believe it's going to be a strong business with good cash flow over the next couple of decades. In between now and when that eventually starts, you'll continue to see major swings in the share price of this company and others like it, as the market struggles to come to terms with what it all means and how it should be priced. Having now held AMZN for just over a year to a 388.93% gain, we've been rewarded well beyond our original expectation. $15 up or $15 down -- it doesn't matter much to us in the short term. In the long term, we expect to see the price stabilize as the business matures. The reason we hold the stock today is that we believe the market will validate that by upping the price from here. When we see Bertlesmann do what it's just done, we feel more confident.

The stock market has been very weak for almost a quarter now, stocks just NOT being the place to be. We're still there, of course, just as we've been there through some horrendously bad quarters for the 15 years we've been investing. Comes with the territory. As I've written before, psychologists tell us that the pain of loss is three times the joy of gain. For many people, this kicks them out of the stock market in down times, sometimes causing them to swear it off altogether. For them, perhaps that's even the right move! Not everyone has the mentality, risk tolerance, or time horizon to be investing in stocks. For us, we do, and we know we'll take our licks.

We do it with a grin on our face.

Fool on!

-- David Gardner, October 7, 1998

Fooleditor Note: Tomorrow Tom and David will be on CNBC's Squawk Box in the morning. What better way to begin the day than with live and in color Foolishness?! They're scheduled to be on at 9:30 a.m. ET, but they could possibly be on earlier in the program. (Ya never know!)

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Bookmark Live Fool Port Quotes

10/07/98 Close
Stock Change Bid ---------------- AMZN -14 7/8 93.44 AOL -5 3/4 92.00 T +1 58.13 DJT + 1/16 3.13 DD - 1/8 53.38 XON -1 11/16 74.06 INVX - 9/16 10.19 IP - 7/16 45.13 IOM - 1/8 3.44 KLAC + 3/8 21.88 LU - 5/8 57.00 SBUX -1 5/8 35.38 COMS --- 27.38 TDFX - 11/16 10.00

Day Month Year History Annualized FOOL -6.32% -11.84% 25.73% 321.96% 41.21% S&P: -1.41% -4.56% 0.03% 111.75% 19.70% NASDAQ: -3.19% -13.65% -6.86% 103.09% 18.51% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 92.00 2429.95% 9/9/97 580 Amazon.com 19.11 93.44 388.93% 5/17/95 1960 Iomega Cor 1.28 3.44 168.47% 10/1/96 84 LucentTech 23.81 57.00 139.41% 4/30/97 -1170*Trump* 8.47 3.13 63.10% 8/12/96 130 AT&T 39.58 58.13 46.86% 2/20/98 200 Exxon 64.09 74.06 15.56% 2/20/98 270 Int'l Pape 47.69 45.13 -5.38% 2/20/98 215 DuPont 59.83 53.38 -10.79% 7/2/98 235 Starbucks 55.91 35.38 -36.73% 8/13/96 250 3Com Corp. 46.86 27.38 -41.59% 8/24/95 130 KLA-Tencor 44.71 21.88 -51.08% 1/8/98 425 3Dfx 25.67 10.00 -61.04% 6/26/97 325 Innovex 27.71 10.19 -63.23% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 65320.00 $62738.13 9/9/97 580 Amazon.com 11084.24 54193.75 $43109.51 4/30/97 -1170*Trump* -9908.50 -3656.25 $6252.25 5/17/95 1960 Iomega Cor 2509.60 6737.50 $4227.90 10/1/96 84 LucentTech 1999.88 4788.00 $2788.12 8/12/96 130 AT&T 5145.11 7556.25 $2411.14 2/20/98 200 Exxon 12818.00 14812.50 $1994.50 2/20/98 270 Int'l Pape 12876.75 12183.75 -$693.00 2/20/98 215 DuPont 12864.25 11475.63 -$1388.63 8/24/95 130 KLA-Tencor 5812.49 2843.75 -$2968.74 7/2/98 235 Starbucks 13138.63 8313.13 -$4825.50 8/13/96 250 3Com Corp. 11715.99 6843.75 -$4872.24 6/26/97 325 Innovex 9005.62 3310.94 -$5694.68 1/8/98 425 3Dfx 10908.63 4250.00 -$6658.63 CASH $12005.75 TOTAL $210978.44

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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.