Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

First Pitch Homeruns
And splits galore

By Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (Feb. 26, 1999) -- The Rule Breaker portfolio bucked the market's trend today and posted a moderate gain. While the rest of the market remained weak, exemplified by a 1.67% loss for the Nasdaq composite, the Rule Breakers had a good day and rose 1.56%. In one of its most active weeks of trading to date, the portfolio managed to blow the doors off:

On the week
Rule Breaker:  +11.45%
S&P 500:        -0.07%
Nasdaq:         +0.20%

After breaking back into positive territory today, the portfolio also managed to "win" the month, as can be seen below:

For February
Rule Breaker:   +1.25%
S&P 500:        -3.23%
Nasdaq:         -8.69%

There's plenty to talk about today, so let's get right to it.

Buying eBay

Yesterday the newest addition to the Rule Breaker portfolio was announced. And today (drum roll please) eBay (Nasdaq: EBAY) officially became part of the Rule Breaker portfolio. Buying a cool 100 shares at $301.50 per share (plus commission) this morning, the total cost to the portfolio was $30,157.95. Just think, this portfolio was started with just $50,000 less than five years ago, yet it can now purchase $30,000 worth of a stock and have it only be slightly more than 5% of the total value.

As with most of the other recent Rule Breaker buys of late, eBay wasted little time in ringing up some impressive gains soon after it was added to the portfolio. In fact, the company was bid to a new all-time high today before settling down to close at $334, up $34 1/2 on the day and $32 1/2 higher than where this portfolio purchased the shares. The portfolio's one-day paper gain on the stock was over $3200, or over 10%. Should we take the gain and run?

Of course not. The volatility and short-term performance really means very little to us. We'd have the same thoughts about eBay (or any of our stocks) if it had been down $30 on the day. It's nice to be ahead right out of the gate, but where the company is 5 years from now (or longer) is what really counts. Today is like hitting a homerun on the first pitch of the season. A great start indeed, but still a long, long way from the ultimate goal of winning the World Series.

Splits galore

David wrote extensively about stock splits on Wednesday, pointing out that stock splits don't change the value of a company one dime. While perhaps a short-term boost of confidence, the long-term influence on the company's performance is nil.

That said, there is quite a bit of activity on the splits front for the Rule Breaker portfolio. Check this out:

  • AOL (NYSE: AOL) split 2-for-1 earlier this week, becoming the portfolio's first penny stock. That is, the portfolio's cost-basis on the stock dropped below a buck. There are now 2200 shares of the company in the Rule Breaker portfolio
  • Amgen (Nasdaq: AMGN) is scheduled to go through mitosis as its stock splits 2-for-1 after the market closes today. The portfolio will have twice as many shares at roughly half the price Monday morning.
  • eBay, the newest addition as well as the portfolio's highest priced stock, is also set to do the splits after the market closes on Monday. After splitting 3-for-1, the portfolio will own triple the shares at approximately a third of today's price.
  • Starbucks (Nasdaq: SBUX) announced on Monday at its annual shareholder meeting that the company will split its stock 2-for-1 early in March. Starbucks also announced a 6% same-store sales increase for the month of February as well as a 29% jump in total revenues for the month. Read all about it here.

Foolish Four switch

In case you missed it, the portfolio did its annual switch of its Foolish Four components this past Tuesday. Out of the portfolio went AT&T (NYSE: T), Lucent (NYSE: LU), International Paper (NYSE: IP), and Exxon (NYSE: XON). There was one holdover that was slightly added to in DuPont (NYSE: DD), while Caterpillar (NYSE: CAT), Chevron (NYSE: CHV), and Goodyear (NYSE: GT) were all new additions to the portfolio. We'll hold these positions tight for a year and an extra day (for tax reasons) before we will spend all of 3 minutes looking over the Foolish Four rankings to see what stocks we should buy or hold at that time. We're now using the RP version of the Foolish Four, which is a minor variation that has some impressive historical performance figures. Want the real scoop? Read Tuesday's recap.

The biggest news to come from the trades was the fact that we decided not to reweight the Foolish Four in the portfolio. Instead of the target 20% of the portfolio set aside for the method, only roughly 10% of the value of the portfolio is now dedicated to the Foolish Four.

Call it "portfolio Darwinism." The reason the Foolish Four stocks have shrunk as a percentage of this portfolio is simply because they have underperformed the rest of the Rule Breaker stocks. We're simply letting our winners run and our losers whither.

Using this strategy, if an investing style has worked well in the past (investing in Rule Breakers, for example) it will naturally be rewarded with more and more weight in the future. On the other hand, the methods that have not performed up to snuff (investing in Foolish Four) will begin to shrink in importance going forward.

Of course, we still strongly believe in the Foolish Four, and we very well may need the anchor of strength and stability the Dow heavies provide should the market hit a bit of turbulence in the near future. If the current Foolish Four doubles this year while the rest of the portfolio remains flat, next year they will have twice the weight in the portfolio they do today. Likewise, should they perform only marginally while the Rule Breakers continue to soar, they will shrink in importance even further.

To close

Think buying eBay is insane? Wondering which Rule Breaker is going to split next? Think the Fool Four should carry more weight in the portfolio? Your thoughts are always welcomed on the Rule Breaker message board.

If you have some time, why not check out the Fool's revamped portfolios. They now have more features, are faster, and remain, best of all, perfectly free! Also, tax time is coming up, and who couldn't use a little tax help? This week's StockTalk -- always a good read -- features a representative from Wendy's. Finally, check out what Harry Jones has to say about cats.

Have a great weekend, Fools!

-- Paul Larson

Will Harry Jones surprise us with a buy report today? Doubtful.

02/26/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +3 1/8  128.13
AMGN  -1 7/8  124.88
AOL   +1 3/4   88.75
ATHM  +2 7/16 106.13
CAT   -  1/8   45.56
CHV   -1 5/8   76.88
DD    -1 7/8   51.31
DJT   -  3/16   4.00
EBAY  +34 1/2 334.00
GT    -  5/16  46.06
IOM   -  1/8    6.00
SBUX  +1 9/16  52.88
TDFX  -  1/8   10.88

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +1.56%   1.25%  13.58% 1040.01%   70.50%
        S&P:     -0.54%  -3.23%   1.06%  183.70%   25.69%
        NASDAQ:  -1.67%  -8.69%   4.35%  217.70%   28.84%

    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     88.75    9665.09%
   9/9/97  1320 Amazon.com     6.58    128.13    1847.41%
  5/17/95  1960 Iomega Cor     1.28      6.00     368.60%
  12/4/98   450 @Home Corp    56.08    106.13      89.24%
  4/30/97 -1170*Trump*         8.47      4.00      52.77%
 12/16/98   290 Amgen         85.75    124.88      45.63%
  2/26/99   100 eBay         301.58    334.00      10.75%
  2/23/99   180 Chevron       79.17     76.88      -2.90%
  2/23/99   300 Caterpilla    46.96     45.56      -2.98%
   7/2/98   235 Starbucks     55.91     52.88      -5.43%
  2/23/99   290 Goodyear T    48.72     46.06      -5.45%
  2/20/98   260 DuPont        58.84     51.31     -12.80%
   1/8/98   425 3Dfx          25.67     10.88     -57.63%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 195250.00  $193250.53
   9/9/97  1320 Amazon.com  8684.60 169125.00  $160440.40
  12/4/98   450 @Home Corp 25236.13  47756.25   $22520.12
 12/16/98   290 Amgen      24867.50  36213.75   $11346.25
  5/17/95  1960 Iomega Cor  2509.60  11760.00    $9250.40
  4/30/97 -1170*Trump*     -9908.50  -4680.00    $5228.50
  2/26/99   100 eBay       30158.00  33400.00    $3242.00
  2/23/99   180 Chevron    14250.50  13837.50    -$413.00
  2/23/99   300 Caterpilla 14089.25  13668.75    -$420.50
   7/2/98   235 Starbucks  13138.63  12425.63    -$713.00
  2/23/99   290 Goodyear T 14127.38  13358.13    -$769.25
  2/20/98   260 DuPont     15299.43  13341.25   -$1958.18
   1/8/98   425 3Dfx       10908.63   4621.88   -$6286.75

                              CASH   $9924.87
                             TOTAL $570003.00

Note: 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 in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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