<THE RULE BREAKER PORTFOLIO>
Low Blood Pressure
And FOOL FOUR WATCH '99 approaches
By Paul Larson (TMFParlay@aol.com)
Chicago, IL (Feb. 5, 1999) -- Like the rest of the market, the Rule Breaker Portfolio had another weak day today as 2.17% of its value vanished into thin air on little notable news. The damage on the day and week? See the numbers below.
Day Week S&P -0.73% -3.14% Nasdaq -1.51% -5.28% Rule Breaker -2.17% -4.39%
What about our blood pressures? See below.
(mm HG, Systolic/Diastolic) David 120/85 Jeff 115/75 Paul 110/80 Rest of Editorial Staff 125/80In other words, we aren't exactly stressed over a couple days in which traders, concerned about one thing or another, were tripping over themselves to get through the exits. True Fools are patient and relaxed long-term investors, not folks downing antacids while glued to real-time quotes all day long, worried about maintaining margin.
An important part of this low-stress investment strategy is the Fool Four. As Jeff noted yesterday, a switcharoo is scheduled for February 22 as this portfolio's anniversary date rolls around. As the rankings now stand, all four of the current Fool Four stocks will be swapped out in two weeks. If we were to use the numbers as of yesterday's close, the four new stocks in the portfolio would be (the envelope, please):
Caterpillar (NYSE: CAT) J.P. Morgan (NYSE: JPM) Union Carbide (NYSE: UK) Chevron (NYSE: CHV)
Of course, there's another nine trading days before we see what stocks the method shows us to buy, and another of the Dow heavies might fall from grace enough to displace one of the above four. Will Da Sears (NYSE: S), one of the very first stocks this portfolio bought when it began back in 1994, make the cut? Stay tuned as FOOL FOUR WATCH '99 swings into gear.
Before saying, "Bon Voyage!" to the current Fool Four stocks, let's see how they have performed since rebalanced on February 20, 1998:
Cost Basis Today Return AT&T $63.63* $88.50 +39.1% Exxon $64.09 $71.81 +12.0% Intl. Paper $47.69 $44.69 -6.3% DuPont $59.83 $55.13 -7.9% Average Return: +9.2% S&P 500: +20.5% *Price as of 2/20/98
As you can see, the Foolish Four method has stumbled a bit this year and has generally underperformed the S&P. Only one of the four stocks, AT&T (NYSE: T), has outperformed the index, and that's a stock that was a hold-over from the previous Fool Four cycle. This analysis is not completely accurate because it does not include the dividends this portfolio has booked, but a more detailed accounting of what has happened would yield the same conclusion -- the Rule Breaker's Foolish Four has underperformed over the past twelve months.
Combine the anemic performance of this portfolio's current Foolish Four with the absolutely stellar gains of the actual Rule Breaker stocks and it should be of little surprise to find that as a percentage of the portfolio's value the Fool Four has fallen to a mere 9.25%. This, unfortunately, is a bit below where we'd like to ideally have it -- up near 20-25%.
Should we throw some of the extra cash in the portfolio the way of the Foolish Four in two weeks, or should we stick to the "let your winners run and your losers wilt" strategy? As always, we appreciate your input on the Rule Breaker Message Board.
Some might suggest that this portfolio dump the Fool Four strategy altogether and stick to what has worked thus far -- investing in Rule Breakers. An interesting suggestion considering what has happened of late, but there are some important reasons why the Fool Four will have a home here for many, many moons.
First, one year does not make or break a strategy, good or bad alike. Almost all of the Dogs of the Dow methods have individual years of underperformance (as we've just experienced), but one can't argue against the decades of backtested data that show, in the long run, the method works.
Probably the most important reason for sticking with the strategy is that investing in Rule Breakers is risky business, and the portfolio may very well need the ballast that the huge and unloved Dow doggies provide down the road. We are consciously taking on large degrees of risk (in hopes of oversized returns) by investing in the likes of @Home (NYSE: ATHM) and Amazon (NYSE: AMZN). The Fool Four is simply an excellent way to buffer that risk a tad.
We are investors who are aware of risk, not gamblers. Should we make a mistake or two, which we will inevitably make, I'm sure we'll be thankful to have the Foolish Four as a foundation to this portfolio. It's easy to understand and implement, is tax-friendly, has an impressive track record (even with the current stocks), and helps keep the blood pressure where it should be.
In case you missed it, one of the Fool Four stocks, Exxon (NYSE: XON), was highlighted in this week's Dueling Fools. Don't miss the combustible duel! The Drip Portfolio is also continuing its look at specific oil stocks, including both Exxon and potential Rule Breaker ballast, Chevron.
Finally, if you're wondering why David hasn't scribed this column in a while it is because he is busy on a globetrotting book tour. Saturday finds the Foolish caravan pulling into Sacramento, and then it's off to Seattle on Monday. Click here for more information on the exact dates and times. The price is right (free) for seeing Dave and Tom, and I guarantee you will be amused while picking up a nugget of knowledge or two. No word yet on if Harry can find the time to get away and do a tour, too.
Have a relaxing weekend, Fools!
-- Paul Larson
What's up with Harry Jones today? Check out his portfolio now.
Day Month Year History Annualized R-BREAKER -2.17% -4.39% 7.25% 976.43% 69.49% S&P: -0.73% -3.14% 1.15% 183.93% 26.08% NASDAQ: -1.51% -5.28% 8.25% 229.59% 30.32% Note: Yearly, historical and annualized returns for the S&P include dividends Rec'd # Security In At Now Change 8/5/94 1100 AmOnline 1.82 164.88 8970.53% 9/9/97 1320 Amazon.com 6.58 115.25 1651.72% 5/17/95 1960 Iomega Cor 1.28 6.88 436.94% 10/1/96 84 LucentTech 23.81 99.88 319.50% 8/12/96 130 AT&T 39.58 88.50 123.61% 12/4/98 450 @Home Corp 56.08 105.13 87.45% 4/30/97 -1170*Trump* 8.47 4.25 49.82% 12/16/98 290 Amgen 85.75 119.63 39.50% 2/20/98 200 Exxon 64.09 71.81 12.05% 2/20/98 270 Int'l Pape 47.69 44.69 -6.30% 2/20/98 215 DuPont 59.83 55.13 -7.87% 7/2/98 235 Starbucks 55.91 49.88 -10.79% 1/8/98 425 3Dfx 25.67 11.75 -54.22% Rec'd # Security In At Value Change 8/5/94 1100 AmOnline 1999.47 181362.50 $179363.03 9/9/97 1320 Amazon.com 8684.60 152130.00 $143445.40 12/4/98 450 @Home Corp 25236.13 47306.25 $22070.12 5/17/95 1960 Iomega Cor 2509.60 13475.00 $10965.40 12/16/98 290 Amgen 24867.50 34691.25 $9823.75 10/1/96 84 LucentTech 1999.88 8389.50 $6389.62 8/12/96 130 AT&T 5145.11 11505.00 $6359.89 4/30/97 -1170*Trump* -9908.50 -4972.50 $4936.00 2/20/98 200 Exxon 12818.00 14362.50 $1544.50 2/20/98 270 Int'l Pape 12876.75 12065.63 -$811.13 2/20/98 215 DuPont 12864.25 11851.88 -$1012.38 7/2/98 235 Starbucks 13138.63 11720.63 -$1418.00 1/8/98 425 3Dfx 10908.63 4993.75 -$5914.88 CASH $39332.55 TOTAL $538213.93Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends). For a history of all transactions, please click here.
</THE RULE BREAKER PORTFOLIO>