Rule Breaker Portfolio

<THE FOOL PORTFOLIO>
A Day of Landmarks
It doesn't get much better than this

by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Nov. 17, 1998) -- The Fool Portfolio had one of those grand days that make us proud to be Fools, as well as a bit richer for the undertaking. The portfolio rose 5.52%, versus gains in the S&P 500 and Nasdaq of 0.30% and 0.90%, respectively. That gain carried us to an ALL-TIME HIGH, bay-bee, flyin' up over 500% for the first time.

That's the first landmark to note -- 500%+ return for the first time -- to be exact, 507.20% return since inception, August 4, 1994. (Over the same period, the S&P 500 is up 148.54%.)

Also exciting is that our 1998 return has topped the 80% mark for the first time this year. Do you remember how negative the market sentiment was in August? End of the bull. Global recession. A nasty bear market -- you can hear it all again, can't you? Do you remember The Dolans flaming us on CBS This Morning? Warms the heart to think of it, as they told America that Foolish investing -- buying and holding -- doesn't work anymore. Let's power up the ol' cyberVCR and watch the tape again...

It was the first of September, and Tom and I had just appeared on CBS This Morning and said that for most investors, the turbulent downdraft of the previous few weeks -- and particularly the day before, a big drop -- was largely irrelevant. We're long-term investors, we said, and you should be, too -- that's the game the individual can win, particularly if he or she manages to avoid reacting to short-term events. Unbeknownst to us, CBS then brought on their regular personal-finance duo, Ken and Darya Dolan, to comment on our comments. Ken flushed a purple shade of red as he actually pointed directly into the camera and bit off these timeless words:

"Let me tell you something. Let me look into this camera, okay? I'm from Wall Street for a lot of years. I'm so tired of this long-term, buy and hold, everything's going to be all right. It's a bunch of baloney! The market goes down 500 points, the market goes down, it goes down, it goes down, up a little bit, too. Let me tell you Mr. Motley Fools and everybody else going on, that the long term is the easiest cop-out way to talk about the market. Yes, if the market continues down, then you take 7 or 8 or 9 years to get the value back again in your retirement plan. And you can keep knocking [us] who are bearish of saying, take your profits off the table, go into treasuries, go into money market funds, go into the sidelines and wait for a better day. You tell the retirees that have been told by Wall Street to go do high tech stocks so they can boost up their retirement plan, you go make up the difference of money to them. Well, they don't have any money, because they are long-term buyers."

One must note with a smile first off that we hadn't "knocked" them at all -- or mentioned them or even been aware of them. But second, consider this: "the long term" is not only not a "cop out" -- it's the only REAL way to make serious money in the stock market! I have never seen such a strong statement made to the viewers of any general-audience daytime program... by anybody who was invited back, that is. And to think how that advice has since proven: The market is today up 17.40% -- that's the S&P 500 -- while the Nasdaq is up 19.62%. The average annual returns of those indices are 11%, meaning it's been another excellent year. For those who are into Rule-Breaking, for those who try to take smart risk to smarten up their returns, our portfolio here shows you the way to even greater returns. And this year is one of the best if not the best (the year's not over yet). Anyway, that's all a long way of saying that 80.93% is well beyond our expectations, and very exciting. Years like this don't come along very often.

But our most distinctive landmark today is not the 500% historic return (more than tripling the market), nor is it the 81% annual return (more than quadrupling the market). It is a first-time achievement that will only ever come to patient, Foolish buy-and-hold investors who look to own great companies and let the market do the rest. It is, for the first time ever, that in the same day, TWO of our stocks rose more than our cost basis. In August of 1994, we paid a now split-adjusted $3.64 per share for AOL, and the stock today rose four bucks. In September of 1997, we paid a now split-adjusted $19.11 per share for Amazon.com, and the stock today rose 22 bucks.

Ironically, we haven't had to work hard at all to achieve these sorts of returns. All we did is buy a portfolio of the best stocks we could find and let our winners run. For many, though, that's harder than it sounds. Many people want to jump in and out of the market, celebrating a gain of five bucks here, or a quick two-point pop there. That's OK with us -- that's their business. Many others, meanwhile, get so spooked by cover stories criticizing good stocks, or pronouncements on financial cable TV, that they bail out of what would've been the best investments of their lives.

The discipline to buy and hold, while commonsensical at heart (fewer decisions to make, less time committed, less worry, more time for other things in life), may in practice demonstrate that common sense isn't very common! I dunno -- you tell me. Fortunately, I receive many e-mails from Fools around the planet every week who have had similar or more impressive success than our own simply by doing that same thing: buying and holding good companies. No magic to it. Just takes a little education, and a dash of fortitude.

The huge move of Amazon.com (Nasdaq: AMZN) comes as the result of a combination of news and (I would surmise) a short squeeze. The company added a new section to its shopping today: Videos. (Click on over to Amazon.com to see it.) Further, Amazon's new "Gift" area contains numerous items that are not traditional Amazon fare: personal electronics, games, gadgets, and toys for all ages. Amazon is asserting itself as the Internet commerce company, not the "mere bookseller" as many bears have called it in the past, intended as a putdown.

Amazon is doing with videos exactly what it is doing with books and music. Namely, it is offering the widest selection at low prices, and with helpful and convenient features alongside. For instance, through its new "Gift-Click" service, all you have to do is enter someone's e-mail address and indicate your gift choice, and you're done. (Amazon goes on to contact that person and work out mailing, etc.) You can do more, if you like, but you can keep it that simple. The convenience of what they're offering is amazing, I think, and is aptly summarized with this line from their press release: "Amazon.com has also added a new gift-recommendation service, Gift Matcher, that suggests gifts based on interests. And for the truly puzzled shopper, Amazon.com offers gift certificates by paper or e-mail to allow recipients to make their own selections. Instant e-mail gift certificates, sent within an hour, can solve the problem of last-minute shopping -- even on Christmas Day."

Overall, it is one of those companies that brilliantly illustrates each of the principles of Rule Breaking that we introduce in our next book and have been talking about in this space over the past few weeks. And the stock has followed through like a charm. Much of what we wrote in our original buy report about this company having the aspiration and the potential to expand well beyond books has already come true. Amazon is not only #1 in book sales on the Internet now, but also #1 in CD sales; it will almost certainly be #1 in videos, and I wouldn't be surprised to see it #1 in gifts, too.

And what else, eventually?

Who knows? That's the fun of investing.

America Online (NYSE: AOL) had no meaningful news today, though the stock does split 2-for-1 as of the end of trading today. So when you see AOL open up in the $70s tomorrow, don't be surprised! (For more information on stock splits, just hop over to the article on that subject in our Motley Fool FAQ.) (Help awaits you 24-by-7 at our good ol' Help Desk -- new Fools in particular should click in and bookmark that page.) A lot of speculation attends stock splits, and the last time AOL split 2-for-1 it declined from there and took three months to catch back up to its pre-split high. Does that mean it'll happen again? Again, who knows?!

If it does, it won't have anything to do with that previous incident. We must all learn to put less emphasis on any deterministic power of past market history. That's one of the surest ways to fail as an investor. Let's stay focused on the future.

I want to go back to one other paragraph that I wrote in this space on what I shall always remember as Dolan Day -- September 1st -- because it continues to sum up succinctly the Foolish approach. If you'll recall, this report came right after previous-day drops in the indices of 7% for the S&P 500, 9% for the Nasdaq, and 12% for the Fool Portfolio. I wrote:

"Again, maybe we drop 10% tomorrow. Maybe we gain 1% tomorrow. Maybe we lose 15% in the fourth quarter. Maybe we instead gain 20% back and close with the fourth year in a row of 20%+ gains (unprecedented). If I sound idle and silly on this subject, it's because all such speculation will always be idle and silly. Those who depend upon it, invest upon it, and believe in it are usually gullible and unFoolish."

Whether it's some Wall Street guy shouting on a morning news program, or your broker on the phone to you on a rainy afternoon, THINK FOR YOURSELF. And maintain that bullish long-term disposition, otherwise known as OPTIMISM -- one of the few true-blue virtues to be held throughout life. (We closed our last book with that.)

Patience is another.

For now, best to pop a cork off the Foolish champagne bottle tonight, because today was absolutely a humdinger.

Fool on!

-- David Gardner, November 17, 1998

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Bookmark Live Fool Port Quotes

11/17/98 Close
Stock Change Bid ---------------- AMZN +22 1/4 148.50 AOL +4 5/16 150.44 T + 1/8 61.00 DJT - 3/16 5.00 DD - 13/16 61.13 XON - 7/8 70.56 INVX - 1/8 13.69 IP + 1/16 45.31 IOM --- 7.75 KLAC - 1/4 35.19 LU + 5/8 85.63 SBUX + 15/16 44.38 COMS - 1/16 35.50 TDFX - 3/8 15.00

Day Month Year History Annualized FOOL +5.52% 13.10% 80.93% 507.20% 52.34% S&P: +0.30% 3.70% 17.40% 148.54% 23.67% NASDAQ: +0.90% 6.05% 19.62% 160.84% 25.08% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 150.44 4036.95% 9/9/97 580 Amazon.com 19.11 148.50 677.05% 5/17/95 1960 Iomega Cor 1.28 7.75 505.28% 10/1/96 84 LucentTech 23.81 85.63 259.65% 8/12/96 130 AT&T 39.58 61.00 54.13% 4/30/97 -1170*Trump* 8.47 5.00 40.96% 2/20/98 200 Exxon 64.09 70.56 10.10% 2/20/98 215 DuPont 59.83 61.13 2.16% 2/20/98 270 Int'l Pape 47.69 45.31 -4.99% 7/2/98 235 Starbucks 55.91 44.38 -20.63% 8/24/95 130 KLA-Tencor 44.71 35.19 -21.30% 8/13/96 250 3Com Corp. 46.86 35.50 -24.25% 1/8/98 425 3Dfx 25.67 15.00 -41.56% 6/26/97 325 Innovex 27.71 13.69 -50.60% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 106810.63$104228.76 9/9/97 580 Amazon.com 11084.24 86130.00 $75045.76 5/17/95 1960 Iomega Cor 2509.60 15190.00 $12680.40 10/1/96 84 LucentTech 1999.88 7192.50 $5192.62 4/30/97 -1170*Trump* -9908.50 -5850.00 $4058.50 8/12/96 130 AT&T 5145.11 7930.00 $2784.89 2/20/98 200 Exxon 12818.00 14112.50 $1294.50 2/20/98 215 DuPont 12864.25 13141.88 $277.63 2/20/98 270 Int'l Pape 12876.75 12234.38 -$642.38 8/24/95 130 KLA-Tencor 5812.49 4574.38 -$1238.12 7/2/98 235 Starbucks 13138.63 10428.13 -$2710.50 8/13/96 250 3Com Corp. 11715.99 8875.00 -$2840.99 1/8/98 425 3Dfx 10908.63 6375.00 -$4533.63 6/26/97 325 Innovex 9005.62 4448.44 -$4557.18 CASH $12005.75 TOTAL $303598.56

</THE FOOL PORTFOLIO>

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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.