Rule Breaker Portfolio

Another Record High
Plus Empty Space fills quickly

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Nov. 5, 1998) -- America Online, Amazon: thanks for the memories. We don't need you anymore. Not a whit!

The Fool Port rose 1.1% to another record high without the aid of its two behemoths, our two Rule Breaking leaders that -- thanks to successful investing -- represent over half the portfolio. (If this allocation concerns you on a personal level, good Fool, please read the October 23rd Bore Port column on portfolio diversity: Dilution Kills.)

Even though AOL and Amazon "sat and spun," most of the Fool Port's kids played hopscotch -- jumping forward two squares for every one square back. End result: another $3,000 in value was created. Consider the beauty of compounding: the $3,000 earned today equals a 6% return on the $50,000 invested in the portfolio in 1994. We've already had some $12,000 days. Eventually we'll have a $50,000 day and double our entire initial investment in one day. That's compounding, rabbit style.

Starbucks (Nasdaq: SBUX) was especially hopping. The stock rose $2 because Starbucks is extending its "coffee in the office" program to small and home offices. Previously, it focused on delivering to large offices. "With more than 14.5 billion cups of coffee consumed in the office each year, [Starbucks] sees a great opportunity to enhance the office experience," said Starbucks Vice President for New Business, Liz Sickler.

Did we mention that this stock is volatile? As we wrote the July buy report, we watched Starbucks rise from $44 to $52. We weren't able to buy it below $55 per share. It soon touched $60. So, in a few weeks, it had risen from the mid $40s to $60, or 25%. Just as quickly, it tumbled 50%, to $29, on near-term news and due to a weak stock market. Just as quickly, the stock has now risen 65%, closing today near $49.

That's caffeine by numbers: Soar. Crash. Soar again. Connect the dots. In the middle: empty space. Fill it with coffee.

Vacuums of empty space aren't allowed in a capitalistic world. One entity vanishes, another immediately moves to fill its space. SyQuest looks to bankruptcy (value destroyed), and the worth of Iomega (NYSE: IOM) soars (value created).

Iomega's stock has gained 66% since last week. Today it added another $1 to close above $9, a price that it hasn't seen since February. Did its business improve 66% in one week? Certainly not. However, one uncertainty (a competitor) has been removed just before the holidays, and most likely forever. Zip up the bag. Tag it. Ship it. (Sorry for the gruesome wordplay long after Halloween.)

The Internet is the largest "vacuum of space" in the business world, and everyone is moving quickly to fill it. Amazon.com (Nasdaq: AMZN) burned the trail to bookselling with so much fanfare that it's able to parlay its success into music -- becoming the number-one tune seller, too. It's also selling videos and soon it will formally sell software. CEO Bezos states that he wants to be able to sell anything from the site.

The company continues to be a Rule Breaker. Today Amazon announced that it's breaking the rules for unsigned music artists and independent recording labels. How great is this? It's great.

Amazon's Advantage program allows independent artists, bands, and recording labels to sell music through Amazon, essentially giving them a chance for visibility that they might otherwise never achieve. Surely some obscure musicians will find success thanks to the Internet and Amazon. (There are a few musicians here at Fool HQ -- including TMF Dwight of the band Waiting for Jane -- who already have CDs and are probably going to beat a trail to this Amazon opportunity.)

The new venture also makes Amazon different from traditional music stores in yet another way. Amazon's selection will be that much more diverse, with acts that you can't buy anywhere else. Next Amazon will likely offer this opportunity to independent publishers and authors, as well. You can finally self-publish your memoirs and sell them on the open market. Post a link to your book with every message board post you make. Be prevalent enough on the message boards, you'll sell some books.

Even in small ways, Amazon is always thinking ahead. It's November 5th and it has a new tab on its main page, a third tab: Books, Music, Gifts.

The Internet is a giant vacuum, ripe for capitalizing upon, but Amazon isn't alone in attacking it. The landscape is rife with competition.

Today America Online (NYSE: AOL) announced the launch of a video superstore, called Videos Now, on AOL, AOL.com, and AOL Digital Cities. The store will offer over 100,000 videos. Even though the shopping experience on AOL hasn't yet matched Amazon's, AOL does represent serious competition on many levels. We might want to be leery of this company... oh, wait. We own AOL, too. Forget it. Go nuts, AOL.

Talk about nuts:

In a press release today, M.S. Farrell & Co., which is "headquartered in the heart of New York's financial district" (its press release, indeed, assures one of the location) reiterated its "Speculative Strong Buy" for Trump Hotels (NYSE: DJT).

The stock responded by sinking like a dead fish. At the bottom of the Farrell press release you notice the disclaimer that "M.S. Farrell has entered into an investment banking agreement with the company to potentially assist in the company's refinancing efforts."

And though this report was published only to reiterate a Strong Buy, it "is not to be construed as representation or as an offer or solicitation by M.S. Farrell to sell or buy any security." Even though, "M.S. Farrell & Co. and its respective officers, partners, employees, shareholders, affiliates and members of their family may have long [bold mine] or short positions in the securities discussed herein..."

Whatever.

Fool on!

-- J.M. Fischer & Co.

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Bookmark Live Fool Port Quotes

11/05/98 Close
Stock Change Bid ---------------- AMZN -1 5/16 128.50 AOL - 7/16 139.75 T +2 1/16 62.25 DJT - 1/4 5.69 DD +2 3/8 61.75 XON + 3/4 72.75 INVX - 3/16 17.25 IP +1 3/16 46.50 IOM +1 1/8 9.13 KLAC + 13/16 33.25 LU +1 3/8 87.88 SBUX +2 48.81 COMS + 1/4 35.13 TDFX - 5/16 13.94

Day Month Year History Annualized FOOL +1.13% 7.64% 72.20% 477.90% 51.07% S&P: +1.36% 3.20% 16.84% 147.35% 23.74% NASDAQ: +0.74% 3.71% 16.99% 155.09% 24.64% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 139.75 3743.05% 5/17/95 1960 Iomega Cor 1.28 9.13 612.66% 9/9/97 580 Amazon.com 19.11 128.50 572.40% 10/1/96 84 LucentTech 23.81 87.88 269.10% 8/12/96 130 AT&T 39.58 62.25 57.29% 4/30/97 -1170*Trump* 8.47 5.69 32.84% 2/20/98 200 Exxon 64.09 72.75 13.51% 2/20/98 215 DuPont 59.83 61.75 3.20% 2/20/98 270 Int'l Pape 47.69 46.50 -2.50% 7/2/98 235 Starbucks 55.91 48.81 -12.69% 8/13/96 250 3Com Corp. 46.86 35.13 -25.05% 8/24/95 130 KLA-Tencor 44.71 33.25 -25.63% 6/26/97 325 Innovex 27.71 17.25 -37.75% 1/8/98 425 3Dfx 25.67 13.94 -45.70% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 99222.50 $96640.63 9/9/97 580 Amazon.com 11084.24 74530.00 $63445.76 5/17/95 1960 Iomega Cor 2509.60 17885.00 $15375.40 10/1/96 84 LucentTech 1999.88 7381.50 $5381.62 4/30/97 -1170*Trump* -9908.50 -6654.38 $3254.13 8/12/96 130 AT&T 5145.11 8092.50 $2947.39 2/20/98 200 Exxon 12818.00 14550.00 $1732.00 2/20/98 215 DuPont 12864.25 13276.25 $412.00 2/20/98 270 Int'l Pape 12876.75 12555.00 -$321.75 8/24/95 130 KLA-Tencor 5812.49 4322.50 -$1489.99 7/2/98 235 Starbucks 13138.63 11470.94 -$1667.69 8/13/96 250 3Com Corp. 11715.99 8781.25 -$2934.74 6/26/97 325 Innovex 9005.62 5606.25 -$3399.37 1/8/98 425 3Dfx 10908.63 5923.44 -$4985.19 CASH $12005.75 TOTAL $288948.50

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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.