Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Richard McSharry is a Fool
Could you walk away for three months?

By David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Jan. 26, 1999) -- The Rule Breaker Portfolio's 3% gain even managed to beat the Nasdaq today, which is more than can be said for us so far in 1999. Our '99 return thus far comes to 5.40%, about triple the S&P 500's 1.88%. But the Nasdaq's rise of 2.71% today means it's sporting a gaudy just-for-January return of 10.98%. Geez, that's about what you'd expect in an average year, leave alone one month.

I have been away all day in New York (starting with our appearance on CBS This Morning), and so I'm not terribly aware of what happened today, beyond just the numbers. The most significant thing I heard was that Compaq was going to spin off its Alta Vista search engine, which doesn't particularly affect or apply to any of our companies, but is nonetheless "Internet-interesting." So dump all over me for not knowing what happened to The Port today, beyond the numbers.

In this, I have something in common with fellow Fool Richard McSharry, one of our most treasured customers over at Fool UK. Richard dropped us a note recently. It said, in effect (I'm mostly paraphrasing):

"I have listened to what you guys have said and have taken it to heart. And thus, this is the first time I've signed online to Fooldom in three months! That's right, I haven't checked anything about my investments for a full three months. Why? Because I am a long-term investor who Foolishly wishes to minimize the time I spend investing in order to maximize the pleasure and richness I get out of life. In fact, I'm saying goodbye to you all for another three months, for the same reason.

"This is my approach! I have done my research for the present. I've bought. I'm gonna spend QUALITY TIME with family and friends and do and see and experience all the wonderful and amazing things that life has to offer: singing, talking, running, walking, drinking, eating, hugging, loving, sleeping, dancing, laughing, crying, shouting, screaming, living, dying... celebrating life because I've only got one... that's as opposed to being glued to the papers, news, the Web, following countless numbers and opinions and arguments and ups and downs and over and backs, trying against impossible odds to figure what the hell is going on and to make decisions that in the long term are neither here nor there. Call me mad, call me a peach, but I believe that God has given me a gift. It's called Life, and how I use it is my gift to him."

Richard's confident inactivity is pure Foolishness. He has bought companies he understands, and he has the confidence and patience to let the market decide about them on its own. So Richard doesn't need to check his quotes 15 times a day (and forget about trading!).

So lemme ask:

Could you do the same?

Now, I'll confess to quoting the BreakerPort numerous times most days, which makes me less Foolish than Richard. I forgive myself (I'm terribly good at that) by pointing out that I'm planted in front of my computer desktop at work and, well, it's just there and it's fun to check -- even when we're down. (Did you know you could type in a portfolio using our Motley Fool Portfolio tool and track yourself directly against the S&P 500? If not, you can e-mail us and we'll help you get that set up -- it's free!) But I'm rarely, if ever, going to trade. Monitoring one's stocks for fun is very different from monitoring them because price wiggles induce you toward action. So again, I'm pretty darn Foolish that way, but cannot compete with Richard McSharry, who is a complete Fool!

A recent discussion in our Rule Breaker Portfolio message board shows that some people, in Apple's marketing words, "think different." Some people look at our portfolio and think we're living off the past. They see the cost bases:

AOL:        $1.28 (now $155.00)
Amazon.com: $6.58 (now $115.09)
Iomega:     $1.28 (now $7.19)

... and they think the future no longer matters to us, because we got these stocks so cheap. "Hey, the Fools have made so much money they're insensitive, and don't care anymore if their stocks get halved," runs the thinking. "They can afford it, and you can't."

Are you kidding? Hey, it's partly because we're insensitive to the short term that we managed to hold these stocks up to such gains! But anyway, look again at a few of those stocks portrayed differently:

AOL: 32% of the portfolio
Amazon.com: 29% of the portfolio

(If you find this bizarre, that two stocks make up 60% of our assets, you may have NOT yet read the first of our portfolio's five management principles, all five of which are required reading for your benefit, understanding, and for context's sake. Do so now! Only risk takers need apply -- or show up to this particular write-up each day.)

As you can well imagine, we care deeply about these stocks -- we generally care far more about our low-cost-basis stocks than any of the others, simply because we hold a lot of them. But please notice that we're patient with them, and unemotional about them. They could get halved and we wouldn't fret. In fact, Amazon.com did get halved in the first part of this month, from a high of $199 to below $100, and none of our tears swept down your computer monitor as you tapped into this page.

This Foolish approach to Amazon's drop is not unprecedented: AOL in 1996 lost 65% of its value, and we held right through. These quick, radical, ultimately misguided shifts in the market's short-term thinking do not affect our view of our companies. With Richard McSharry, we can walk away for three months. Send me to the South Pacific right now without Web access for the rest of the winter and that's just fine with me! (Especially if you provide the credit card for incidentals.) I like my Amgen and my Exxon and my @Home and all the others, and whether (and how much) the market likes them over the next three months is not my concern. With Shakespeare's Henry the Fifth I can say:

It yearns me not if men my garments wear;
Such outward things dwell not in my desires.

Now, if you "think different," that's OK with me. Just make sure you know where you're coming from (there are many roads to investment success); you now clearly know where we're coming from. Of course, we will always continue to state and reiterate our philosophy through our books and these online recaps, so long as anyone wishes to read them. Indeed, when you have as radically original an approach to this subject as we do, you find a constant need to do this. Where else do you find people (us) who celebrate when the lead columnist of Barron's suggests in no uncertain terms that its top holding (Amazon.com) is grossly overvalued?

Yep, happened again in his page one column last weekend. If you're new to The Fool, you might think, "Whoa there! Bad news! The nation's number one financial weekly says this Fool stock is worth only a fraction of its present price!" But those who are regular Fools -- in particular, those who have read our new book, Rule Breakers, Rule Makers -- know that this is one of the most sanguine developments imaginable for a Rule Breaker stock! We literally ache for such moments, and shake with joy at their arrival.

If you don't know why, it's all there on pages 117-122 of the book. Forgive me for sounding like a Dianetics commercial on TV (remember those? -- they'd go, "What's the best way to move objects with your mind? Page 123" -- L. Ron Hubbard -- giggle). It takes some length to explain it, and I can't run on too long here, each night.

Hey, maybe the biggest difference between me and Richard McSharry is that I love this game of investing so much -- even though I move our pieces around so infrequently -- that I don't really want to walk away for three months.

Fool on!

David Gardner, January 26, 1999

01/26/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +2 23/32115.09
AMGN  -1 7/16 112.75
AOL   +9 3/4  155.00
T     -2 3/4   86.88
ATHM  +4 13/16109.88
DJT   +  1/8    4.69
DD    -  7/8   53.88
XON   +  3/8   72.38
IP    +  3/4   42.81
IOM   -  9/16   7.19
LU    +7 11/16109.56
SBUX  +  13/16 50.88
TDFX  +  1/16  15.00

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +3.00%   5.40%   5.40%  957.89%   69.38%
        S&P:     +1.49%   1.88%   1.88%  185.90%   26.45%
        NASDAQ:  +2.71%  10.98%  10.98%  237.89%   31.26%
 Note:  Yearly, historical and annualized returns for the 
S&P include dividends

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    155.00    8427.26%
   9/9/97  1320 Amazon.com     6.58    115.09    1649.35%
  5/17/95  1960 Iomega Cor     1.28      7.19     461.34%
  10/1/96    84 LucentTech    23.81    109.56     360.19%
  8/12/96   130 AT&T          39.58     86.88     119.50%
  12/4/98   450 @Home Corp    56.08    109.88      95.92%
  4/30/97 -1170*Trump*         8.47      4.69      44.65%
 12/16/98   290 Amgen         85.75    112.75      31.49%
  2/20/98   200 Exxon         64.09     72.38      12.93%
   7/2/98   235 Starbucks     55.91     50.88      -9.00%
  2/20/98   215 DuPont        59.83     53.88      -9.96%
  2/20/98   270 Int'l Pape    47.69     42.81     -10.23%
   1/8/98   425 3Dfx          25.67     15.00     -41.56%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 151923.75  $143239.15
   8/5/94  1100 AmOnline    1999.47 170500.00  $168500.53
  12/4/98   450 @Home Corp 25236.13  49443.75   $24207.62
  5/17/95  1960 Iomega Cor  2509.60  14087.50   $11577.90
 12/16/98   290 Amgen      24867.50  32697.50    $7830.00
  10/1/96    84 LucentTech  1999.88   9203.25    $7203.37
  8/12/96   130 AT&T        5145.11  11293.75    $6148.64
  4/30/97 -1170*Trump*     -9908.50  -5484.38    $4424.13
  2/20/98   200 Exxon      12818.00  14475.00    $1657.00
   7/2/98   235 Starbucks  13138.63  11955.63   -$1183.00
  2/20/98   215 DuPont     12864.25  11583.13   -$1281.13
  2/20/98   270 Int'l Pape 12876.75  11559.38   -$1317.38
   1/8/98   425 3Dfx       10908.63   6375.00   -$4533.63

                              CASH  $39332.55
                             TOTAL $528945.80

</THE RULE BREAKER PORTFOLIO>

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