Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

26,019,347,680%
Has the Rule-Breaker strategy worked?

By Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (March 8, 1999) -- The Rule Breaker port continued to absolutely shatter all performance records today with a 3.37% increase in value on this relatively quiet Monday. This soundly beat the Nasdaq and S&P 500, which were up 2.59% and 0.57%, respectively, for the day. For the year the portfolio is just shy of gaining 20% -- not bad since it's only the beginning of March!

There was really not a whole lot of substantive news regarding the Rule Breaker stocks released today. Although, I should mention that Rick Munarriz (TMF Edible) spent much of his time surfing eBay (Nasdaq: EBAY) last night during our co-hosted chat on the Fool's America Online site. He reported back several times that the eBay site was loading extremely slowly. The eBay bears may look at this anecdotal news and say the company needs to upgrade its servers. On the other hand, the eBay bulls would generally argue this to be a sign of extreme activity for the company. As anyone who has been with AOL for a few years will tell you, slow service and busy signals are many times a simple signal of strong demand.

And what exactly was Rick posting to the site last night? A Motley Fool classic! Check out Item #75486615. Hurry! Only 6 more bidding days remain!

On this rather slow day I thought I would go back and see just how well the Rule Breaker method has performed. Specifically, I was curious if this portfolio would have been better off by standing pat on its investments before the Fool Portfolio renovation to the Rule Breaker portfolio. The incarnation of the portfolio included selling completely three stocks that did not meet the Rule Breaking criteria as well as trimming portions of the high flying yet heavily weighted Amazon.com (Nasdaq: AMZN) and America Online (NYSE: AOL). First off, here's a table of what the sales yielded:


Fool Portfolio Sales on 12/1/98
Company     Shares  Sale price  Proceeds*
Amazon      140     $203 5/8    $28507.50
AOL         320      $89 3/16   $28540.00
Innovex     325      $16 3/16    $5260.94
KLA-Tencor  130      $34         $4420.00
3Com        250      $43        $10750.00

Total Proceeds                  $77478.44
(*does not  include commissions)

I did not include commissions above because the cost would have been avoided if the portfolio stood pat on the above investments. Also, notice that AOL and Amazon have since split their shares. On this next table the current value of the assets the portfolio sold is listed, as of today's close:


The "Stay Put" Fool Portfolio, as of 3/8/99
Company     Shares   Bid        Value      
Amazon      420      $122 1/8   $51,292.50 
AOL         640       $90 1/16  $57,640.00
Innovex     325       $13 3/4    $4,468.75
KLA-Tencor  130       $56 7/8    $7,393.75
3Com        250       $25 1/2    $6,375.00
Innovex dividends foregone         +$13.00

Theoretical Value Today        $127,183.00

Absolute Change in Value       +$49,704.56
Percentage Change in Value          +64.2%
Annualized Change in Value         +545.6%           

Anyone else surprised at these figures? I'm sure most of us have experienced the sinking feeling of seeing a stock rocket to the moon soon after selling, but this is a bit extreme. While dumping 3Com (Nasdaq: COMS) looks like a suave move looking back, this portfolio has yet again given up some massive gains by selling a portion of America Online.

Nevertheless, let's move on and see exactly how the proceeds from the above sales were spent, and how the newest additions to the Rule Breaker portfolio have performed:


Rule Breaker Purchases
Date      Company  Shares  Price      Cost basis**
12/4/98   @Home    450     $56 1/16   $25,236.13
12/16/98  Amgen    290     $85 3/4    $24,867.50
2/26/98   eBay     100     $301 1/2   $30,158.00

Total Cost Basis                      $80,261.63
(**Includes commissions)

Rule Breaker Value, as of the close on 3/8/99
Company   Shares  Bid         Value          
@Home     450     $121 3/16   $54,534.38
Amgen     580      $68 1/4    $39,585.00
eBay      300     $170 15/16  $51,281.25

Total                        $145,291.88

Total Gain:                  +$63,030.25 
Percentage change in value:       +81.0% 
Annualized: (1)                  +832.9%
Annualized: (2)                +2,715.3%

Even though the positions the portfolio sold have performed exceptionally well, the new Rule Breakers have flown even higher. The first annualized number assumes the positions were all started on December 1, while the second annualized number takes into consideration that the stocks were bought at later dates. And since eBay is up over 70% for the portfolio in just 7 trading days (yowsa!), the second annualized figure is obviously much, much higher.

The conclusion I come to with all this number crunching is that while some of the positions that were thrown overboard to make room for the Rule Breaking stocks have had absolutely stellar performances, the Rule Breaking method of picking stocks is off to a scorching start. Of course, it's hard to make any solid claims with a track record barely topping three months, but the Rule Breaking strategy has, nevertheless, had an absolutely killer run during its infancy.

Quite frankly, these are the types of returns that we would expect over 3 years, not over 3 months. The S&P has had an average annual return of roughly 13% since the second world war, and this is the number we are striving to beat. We're ecstatic if we double the S&P, and there are no adjectives that describe the feelings when receiving the kind of returns the Rule Breakers have been blessed with thus far.

I came across an interesting fortune cookie over the weekend that I think fits this moment for the Rule Breakers quite well. The omnipotent and omniscient forces behind the fortune cookie said:

"When one lacks a sense of awe, there will be disaster."

Take this point home. The annualized performance of eBay in its young life in the portfolio is a mere 26,019,347,680%. Believe me, we have awe in spades.

See you on the Rule Breaker message board!

-- Paul Larson

What's up with Harry Jones today?

03/08/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +  11/16 122.19
AMGN  +2 1/8   68.25
AOL   +4       90.88
ATHM  +3 7/16 121.19
DJT   -  1/16   4.13
CHV   -  1/4   81.06
CAT   -  1/4   49.63
DD    +  5/16  53.88
GT    +1       52.00
IOM   -  1/16   5.50
SBUX  +2 1/8   60.88
TDFX  -  5/16   12.94
EBAY  +21 3/4 171.00

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +3.37%   5.42%  19.73% 1101.76%  71.92%
        S&P:     +0.57%   3.59%   4.67%  193.39%   26.44%
        NASDAQ:  +2.59%   4.79%   9.35%  232.92%   29.97%

Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     90.88    9898.90%
   9/9/97  1320 Amazon.com     6.58    122.19    1757.17%
  5/17/95  1960 Iomega Cor     1.28      5.50     329.55%
  12/4/98   450 @Home Corp    56.08    121.19     116.10%
  2/26/99   300 eBay         100.53    171.00      70.10%
 12/16/98   580 Amgen         42.88     68.25      59.18%
  4/30/97 -1170*Trump*         8.47      4.13      51.29%
   7/2/98   235 Starbucks     55.91     60.88       8.88%
  2/23/99   290 Goodyear T    48.72     52.00       6.74%
  2/23/99   300 Caterpilla    46.96     49.63       5.67%
  2/23/99   180 Chevron       79.17     81.06       2.39%
  2/20/98   260 DuPont        58.84     53.88      -8.44%
   1/8/98   425 3Dfx          25.67     12.94     -49.60%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 199925.00  $197925.53
   9/9/97  1320 Amazon.com  8684.60 161287.50  $152602.90
  12/4/98   450 @Home Corp 25236.13  54534.38   $29298.25
  2/26/99   300 eBay       30158.00  51300.00   $21142.00
 12/16/98   580 Amgen      24867.50  39585.00   $14717.50
  5/17/95  1960 Iomega Cor  2509.60  10780.00    $8270.40
  4/30/97 -1170*Trump*     -9908.50  -4826.25    $5082.25
   7/2/98   235 Starbucks  13138.63  14305.63    $1167.00
  2/23/99   290 Goodyear T 14127.38  15080.00     $952.63
  2/23/99   300 Caterpilla 14089.25  14887.50     $798.25
  2/23/99   180 Chevron    14250.50  14591.25     $340.75
  2/20/98   260 DuPont     15299.43  14007.50   -$1291.93
   1/8/98   425 3Dfx       10908.63   5498.44   -$5410.19

                              CASH   $9924.87
                             TOTAL $600880.81

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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