Rule Breaker Portfolio
The Element of Surprise

By Jeff Fischer (TMFJeff@aol.com)
December 31, 1998

Paris, France (Dec. 31, 1998) -- 1998 was a record year the likes of which we won't ever forget. The Rule Breaker Portfolio practically sprinted all year, its leading stocks racing to keep pace with an industry (the Internet) that is growing more quickly than anyone expected. The final numbers for the year (not including dividends on the S&P 500) ARE... drum roll, please...

R-B   +199.08%
S&P   +28.58%
Nasd  +39.63%
(By the way, beginning on January 4, 1999, all five of the Fool's real-money portfolios will be measured against the S&P's return including reinvested dividends, and the S&P's return with dividends included will be shown since each portfolio's inception. In the past, it was difficult to consistently obtain this number, but now we have it daily.)

Fellow Fools, check out those numbers for 1998 again, and -- if you haven't matched or bettered them -- realize that they can be your returns. They can and should be. You should be beating the market more often than not, and paying nobody (but yourself!) to do so.

This portfolio's performance stomped the market and beat 100% (all of 'em) of the high-fee mutual funds "offered" to you by an outdated, bloated industry of underperforming professionals. You can see how this portfolio has been managed since 1994, longer than many mutual funds have been around! Every move we make is provided to the public before we make it. There is nothing extraordinary about how the Rule Breaker Port was managed this year or any other. It's all done in the open for Fools everywhere to learn from, and to derive ideas in how to manage their own money. (See the 13 Steps to get started!)

One of the lessons learned this year from Rule Breaker investing involves the Element of Surprise. Rule Breaking companies consistently have the opportunity to surprise investors. These companies operate in open situations and are essentially able to leverage their business with one flip of an imaginary switch, or one tweak of a Foolish lever. Whether its America Online (NYSE: AOL) announcing a set-top box service, or @Home (Nasdaq: ATHM) buying a high-speed advertising media producer (as it did two weeks ago), or Starbucks (Nasdaq: SBUX) beginning to sell food and ice cream, or finally Amazon.com (Nasdaq: AMZN) adding toys and games to its business model with one extra tab on its page, these companies are just beginning to show how they can expand into new markets.

The ability of leading companies to continually surprise investors helps their stocks continue to outperform. And only momentum creates more momentum, because it's only when a company has the leading momentum that it has the ability to increase its lead by adding new business lines, buying complementary but different businesses, and so forth. If a company isn't leading, it's still working to catch up. It is always one step behind, meaning that it's not about to venture into new businesses -- not until it has its primary business running as well as the leading competition. Meanwhile, the leader is already moving ahead into new markets, and is Breaking old Rules. This is why being the Top Dog and First Mover (as all Rule Breakers must be) is so important, and it's also partially why Top Dogs are usually given much higher valuations.

Can your companies surprise you in 1999? Will your leading investments present surprise after surprise in this new year? Will the year 2000 find you in a position of Foolish wonderment: "Wow, this Widget company that I bought in 1998 looks very different now and is continuing to lead its markets!"

I believe that our companies most likely to continue to surprise will include Amazon.com (more business lines and more community features will probably be added in 1999). Also, @Home will surprise us. We're just beginning to see the types of deals that it will sign in the new year, and I think this will be the year that @Home "comes of age." If not this year, then certainly in 2000. Then there's Starbucks. We're going to continue to see new and revamped product lines (including world-class teas) from the coffee-experience leader. Of course, we can't leave out America Online. 1999 will surely offer the company (and its soon to-be-created Netscape branch) its largest mega-media deals yet. Companies of S&P 500-size are lining up to sign up and pay big to buy a presence on AOL and Netscape's most-trafficked pages. (Pages that capture about 50% of the Web's users!)

Rule Breakers surprise, and our leading Rule Breakers will continue to pour on the hot sauce -- so hot that it surprises ya -- in 1999. Rule Makers, on the other hand, are reliable. The giant companies in the Rule Maker Portfolio consistently find ways to increase earnings per share a very healthy 12% or 15% per year. Consider Gillette (NYSE: G) -- assuming it's a Rule Maker. The company introduced a two-blade razor years ago, offering advantages over one blade. This year, it introduced the Mach III razor, with three blades. Let us guess. What's next? Four blades, then five, then six, and so on.

Think about it: the company just went from two blades to three blades. How hard would it have been to go from two blades to five blades instead? Or six? Of course, those revolutionary products will arrive years from now, after four blades debuts and has a large promotion, and then five, and so forth. Rule Makers dominate industries and find small but meaningful ways to leverage their position that extra bit each year. Rule Breakers are still defining their industry. (Two years ago, who thought Starbucks would be the leading coffee ice cream seller in the country? Or would offer a lunch menu?)

Whatever happens, 1999 should be even more exciting than 1998. There is probably no better time to be a Foolish investor and to have your future in your own capable, Foolishly educated hands. And the community here on the Fool message boards is one of the best places to keep in touch with the inside track of your companies.

Much of the focus in 1999 will again be on Internet-centric stocks. As is proposed in our Industry Focus 1999 book, what if the bulls are right? Dead right. What if the Internet will reach 90% of American homes in ten years and become society's favorite way to shop/bank/keep records/stay in touch/schedule car and doctor appointments/order pizza/make travel plans/learn/and so forth? Hasn't convenience and price always won in the consumer market? And doesn't the Internet increasingly offer both of these qualities?

You've certainly got to invest long-term if you're going to invest here at all, because Internet stocks could get chopped in half next week; or they could keep rising; or both in one day; who knows? We buy and hold, optimistic that the year 2005 will be even more exciting than now; and realizing that, perhaps in 2010, "the good old ancient 1990s" will be remembered as one of the best investment opportunities for every generation living at the time: this decade presented the birth of a dynamic, life-changing, Rule Breaking industry. It will create new leaders, and new laggards, too. So one must still invest in it Foolishly. Or bet against it. Or choose to ignore it. Those are the options. Which is more Foolish? Our long-term money is certainly with the industry and its leaders.

We'll exit 1998 with a surprise of our own. On January 4, 1999, a new real-money portfolio is launching on The Motley Fool. It's called the Harry Jones Portfolio, and it's going to forever change how you think about investing in mutual funds or any other underperforming investment. This portfolio, we guarantee, will never underperform an S&P 500 index fund. In fact, it's our only guaranteed portfolio (in a world where there are almost no guarantees). It's run by a man named Harry Jones. Tune in Monday to find out all about it.

Finally, just a reminder that as 1998 comes to a close today, and so too does our annual charity drive for Share our Strength. If you haven't made a donation yet, what are you waiting for? Go ahead and contribute now while there's still a little time!

We wish everyone a Foolishly surprising 1999. Fool on!


 Recent Rule Breaker Portfolio Headlines
  12/28/00  State of the Rule Breaker
  12/27/00  Celera's Pipeline
  12/26/00  Is Amgen's First CEO Right?
  12/22/00  Selling Strategy
  12/21/00  Visionary Venture Capital
Rule Breaker Portfolio Archives »  

Rule Breakers, Rule MakersOrder your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Rule Breaker's investment style; the second half, on Rule Makers, further explains Cash-King investing.


12/31/98 Close
Stock  Change    Bid 
 ---------------- 
AMZN    ---   321.25
AMGN  +1 3/16 104.56
AOL   +7 7/8  155.88
T     -1 1/16  75.75
ATHM  +2 3/4   74.25
DJT   -  1/16   3.75
DD    -1 3/16  54.25
XON   -1 1/2   73.13
IP    +1 1/16  44.81
IOM   -  1/8    7.31
LU    +1 5/16 109.94
SBUX  +1 1/2   56.13
TDFX  +1 7/16  12.63
 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +2.19%  44.46% 199.08%  903.70%   68.80%
       *S&P:     -0.12%   5.47%  28.58%  181.12%   26.44%
        NASDAQ:  +1.19%  12.47%  39.63%  204.46%   28.76%
*S&P 500 Numbers have been adjusted to reflect dividends.


    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    155.88    8475.40%
   9/9/97   440 Amazon.com    19.74    321.25    1527.59%
  5/17/95  1960 Iomega Cor     1.28      7.31     471.11%
  10/1/96    84 LucentTech    23.81    109.94     361.77%
  8/12/96   130 AT&T          39.58     75.75      91.40%
  4/30/97 -1170*Trump*         8.47      3.75      55.72%
  12/4/98   450@Home Corp.    56.08     74.25      32.40%
 12/16/98   290 Amgen         85.75    104.56      21.94%
  2/20/98   200 Exxon         64.09     73.13      14.10%
   7/2/98   235 Starbucks     55.91     56.13       0.39%
  2/20/98   270 Int'l Pape    47.69     44.81      -6.04%
  2/20/98   215 DuPont        59.83     54.25      -9.33%
   1/8/98   425 3Dfx          25.67     12.63     -50.81%

    Rec'd    #  Security     In At     Value      Change
   9/9/97   440 Amazon.com  8684.60 141350.00  $132665.40
   8/5/94  1100 AmOnline    1999.47 171462.50  $169463.03
  5/17/95  1960 Iomega Cor  2509.60  14332.50   $11822.90
  12/4/98   450@Home Corp. 25236.13  33412.50    $8176.37
  10/1/96    84 LucentTech  1999.88   9234.75    $7234.87
  4/30/97 -1170*Trump*     -9908.50  -4387.50    $5521.00
 12/16/98   290 Amgen      24867.50  30323.13    $5455.63
  8/12/96   130 AT&T        5145.11   9847.50    $4702.39
  2/20/98   200 Exxon      12818.00  14625.00    $1807.00
   7/2/98   235 Starbucks  13138.63  13189.38      $50.75
  2/20/98   270 Int'l Pape 12876.75  12099.38    -$777.38
  2/20/98   215 DuPont     12864.25  11663.75   -$1200.50
   1/8/98   425 3Dfx       10908.63   5365.63   -$5543.00

                              CASH  $39332.55
                             TOTAL $501851.05

Read More Rule Breaker Reports