Rule Breaker Portfolio

Breaker Principle #2
The ongoing series that defines Foolosophy

by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Nov. 11, 1998) -- The Fool Portfolio got whacked badly today, dropping a noteworthy 3.74% versus minor-league drops in the S&P 500 and Nasdaq of 0.64% and 0.19%, respectively. We're not going to have many good days when AOL and Amazon each lose more than five bucks, and this was one of those days. In fact, only one stock in this portfolio gained ground, which was KLA-Tencor rising $1 1/2 to $36 11/16.

We're going to skip the typical recap of our stocks' news and movements today, in order to focus on a more important topic. However, as always, do drop by our message boards at http://boards.fool.com to find the most intelligent conversation going about the stocks in this portfolio. What's the single most popular stock message board at www.fool.com? Dell Computer. One of my favorite features of our Web-based message boards is that Top 25 page, where you can see and click into the most popular discussions across Fooldom over the past day, week, or month.

OK, in Monday's report, we tossed out the first of our list of the principles we use to govern this portfolio. You'll find it by clicking here -- though please notice that it's now ensconced comfortably up there in the listbox that accompanies this report every day. What I published Monday was really just a rough draft, as we invited your comments to help us further define and refine the principle. We got an excellent (very helpful!) response, and will incorporate some of your comments in the final draft which will be launched in this space when we change the portfolio name in December. Thank you very much.

Before publishing the second principle tonight, I want to make one thing really clear that I may not have been clear enough about in the past -- clear enough, frequently enough, that is. Namely, we will be changing this portfolio's name to the "Rule Breaker portfolio," and we may be swapping a couple of stocks out for some new ones. BUT, by and large, what you already see is mostly what you'll continue to get. The idea of publishing these principles is not to create a new portfolio, or radically rejigger how we invest. Nope. It's just to state overtly, in as helpful and direct a way as possible, the philosophy that underlies our management of the Rule Breaker portfolio. We have frequently communicated this philosophy through these reports, but not until now have we ever taken the time to create permanent explicit statements of our portfolio management philosophy, statements that any novice can come in and always see right there, and read for the first time, and understand.

In January, my brother Tom and I will wheel out our newest book -- and my personal favorite -- The Motley Fool's Rule Breakers, Rule Makers. In that book, I write the Rule Breakers section, in which I identify and explore the six key attributes shared by ALL Rule Breaker companies. Those attributes will actually be briefly summarized in an upcoming principle (not this one). Please note that the book explores the attributes of the Rule-Breaking companies. What you're reading here in these principles that we're publishing are the principles we use to manage this portfolio. That's a key distinction. Our new book is a stock-picking book; this developing body of online work you're reading and participating in is all about portfolio management -- specifically, the management of this portfolio.

As always, each of our portfolio principles is not an immutable piece of sculpture. We are purposefully laying them out here in order to gauge and garner your reaction. We would love to receive e-mail about the principle below, particularly from those who enjoy engaging in the thinking that underlies what we're doing here. If you appreciate the statement, let us know. If you see some way to improve it, please let us know. If it's not clear enough to you, let us know about that, too! We're here for ya! In fact, without you, we wouldn't be here. That's at the core of Foolishness.

#####

We are maximizing our long-term returns with our own money to the best of our ability.

The Rule Breaker portfolio is, first of all, our own money. No model portfolio here, so no decisions made lightly, either. It may be so obvious as to not bear mentioning, but we'll mention it anyway: This is our money, not your money. Your money is your own, and you make all the decisions about it -- unless you've decided to hire someone else to manage it for you... which is, itself, a decision you made. Just as we will not second-guess you or talk you down, we hope you'll return the favor. We will try to help you, occasionally challenge your thinking, offer any criticism constructively. We hope you'll return that favor, as well.

Now, because it is our own REAL money, we are investing with the intention of maximizing our investment returns over the long haul. The stocks picked, the allocation chosen, all of these things are designed with the intent of stackin' up the bills. We hope eventually to be scouring the neighborhood for empty barrels, just because we no longer have enough of our own to wheel our mounds o' greenbacks outta the house. We'll close the paragraph with this word again: maximize.

There is only one exception. We exclude from investment consideration some companies whose products we believe to be harmful to the world at large -- companies whose business models are predicated on the sales of stuff that, while it may be legal, is nevertheless damaging. So even if such a company appears to be a good investment, we will ignore it. That is the only exception to our stated mission, which otherwise is completely dedicated to and predicated upon the maximization of our investment returns. This is our decision, and we don't have any big attitude about it. We're not self-righteous. What we exclude, you may well wish to include. And what we include, you may yourself be excluding. Everyone's different. As we wrote in You Have More Than You Think: "Buy what you are."

Next, note our outlook. It is different than most. Most focus too much on short-term returns; they are unable to see the proverbial forest for the proverbial trees. The two most guilty of this fallacy are the financial media -- aiming its microscope on the here and now, in order to get you to pay attention -- and Wall Street -- trading in and out on a daily or weekly basis, judging its returns by the quarter. A perfect example of where we differ from most is our ownership of stock in Iomega. We bought the stock early on, and have simply sat and held it ever since (once selling a portion to redeploy the money into another investment). While the stock went up, the media focused on how much it had gone up and called it "hype." While the stock went down, the media's coverage effectively forgot that it had ever gone up. So while the stock remains well down from its highs, our investment in Iomega is still up many times over the market's benchmark return since our purchase. Yet the last time we were on CNBC they asked us about how we'd failed with Iomega.

Typical.

Just make sure you understand this is typical, so that you don't let yourself fall into the same trap of short-term thinking.

Finally, in our aim as investors to maximize our long-term after-tax returns, we maintain a high degree of open-mindedness and flexibility. We observe the lessons of organic evolution and note that the best way to survive is -- when changing conditions make it necessary -- to adapt. So we are not ultimately wed to any given form of investing, any single approach, any one investment. We are wed only to our goal of achieving the best, most consistent, long-term returns achievable.

#####

Click here to e-mail, if so moved. Finally, as Jeff mentioned last night, we will be opening a message board dedicated to discussion of this Rule Breaker portfolio in the coming weeks. But we really have to set out our principles, first.

Fool on!

-- David Gardner, November 11, 1998

WE DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!

Order your copy of Rule Breakers, Rule Makers in advance. The book doesn't come out until January, but you can reserve your copy today!

Today's FoolWatch: all the latest in Fooldom.


Bookmark Live Fool Port Quotes

11/11/98 Close
Stock Change Bid ---------------- AMZN -5 1/8 126.63 AOL -7 3/4 137.13 T - 9/16 62.69 DJT --- 5.69 DD - 5/16 58.94 XON --- 70.13 INVX - 5/8 14.25 IP -1 1/2 44.44 IOM - 9/16 7.06 KLAC +1 1/2 36.69 LU - 3/8 88.44 SBUX -1 7/16 45.31 COMS - 3/16 33.31 TDFX - 11/16 15.31

Day Month Year History Annualized FOOL -3.74% 3.99% 66.36% 458.31% 49.62% S&P: -0.64% 2.03% 15.51% 144.54% 23.31% NASDAQ: -0.19% 5.12% 18.58% 158.57% 24.93% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 137.13 3670.86% 9/9/97 580 Amazon.com 19.11 126.63 562.58% 5/17/95 1960 Iomega Cor 1.28 7.06 451.58% 10/1/96 84 LucentTech 23.81 88.44 271.46% 8/12/96 130 AT&T 39.58 62.69 58.39% 4/30/97 -1170*Trump* 8.47 5.69 32.84% 2/20/98 200 Exxon 64.09 70.13 9.42% 2/20/98 215 DuPont 59.83 58.94 -1.50% 2/20/98 270 Int'l Pape 47.69 44.44 -6.82% 8/24/95 130 KLA-Tencor 44.71 36.69 -17.95% 7/2/98 235 Starbucks 55.91 45.31 -18.95% 8/13/96 250 3Com Corp. 46.86 33.31 -28.92% 1/8/98 425 3Dfx 25.67 15.31 -40.34% 6/26/97 325 Innovex 27.71 14.25 -48.57% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 97358.75 $94776.88 9/9/97 580 Amazon.com 11084.24 73442.50 $62358.26 5/17/95 1960 Iomega Cor 2509.60 13842.50 $11332.90 10/1/96 84 LucentTech 1999.88 7428.75 $5428.87 4/30/97 -1170*Trump* -9908.50 -6654.38 $3254.13 8/12/96 130 AT&T 5145.11 8149.38 $3004.27 2/20/98 200 Exxon 12818.00 14025.00 $1207.00 2/20/98 215 DuPont 12864.25 12671.56 -$192.69 2/20/98 270 Int'l Pape 12876.75 11998.13 -$878.63 8/24/95 130 KLA-Tencor 5812.49 4769.38 -$1043.12 7/2/98 235 Starbucks 13138.63 10648.44 -$2490.19 8/13/96 250 3Com Corp. 11715.99 8328.13 -$3387.87 6/26/97 325 Innovex 9005.62 4631.25 -$4374.37 1/8/98 425 3Dfx 10908.63 6507.81 -$4400.81 CASH $12005.75 TOTAL $279152.94

Are you a Foolish investor?
The Motley Fool Recommends...
Industry Snapshot
New format! A stock idea, industry overview, top players, and financials -- every two weeks! Get more info or order.

Fool Port Reports
The nightly scoop on the Fool Port Report, delivered straight to your e-mailbox. Get more info or order.

Foolish Eight Stock Screen
Here at Last! Foolish Eight Stock Screen. Get more info or order.

Other Fool Products...
Subscriptions
Primers
Reports
Investing Tools
Books
Fool Gear

Shop FoolMart!








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.