Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Live, from VA!
Hip-Hop Tommy buys eBay, Amazon

by Jeff Fischer

ALEXANDRIA, VA (March 9, 1999) -- Coming to you live from the snowbound East Coast, this Foolish column is being broadcast around the world via the World Wide Web. Our guests in tonight's column include analyst John Smiley of Disgruntled and Gruntled Brokers; Hip-Hop Tommy, a day-trader who trades with Abercrombie and Snitch Discount Brokerage & T-Shirts Inc.; and Ms. Ginny Olive Martini, who hails from the revered Glass & Stem & Toothpick Brokers in New York City.

Let's begin with Ms. Martini. Ms. Martini, what're your thoughts on the stock market?

"First, thank you, Jack."

Jeff.

"What?"

My name is Jeff.

"I am ever so sorry. That's a horrible name. My thoughts on the stock market. They're very dry right now, you might say. Frankly, it's a complex machine and it's being ruined -- watered down if you will -- because it's being popularized by the masses. As soon as the masses get into something that they can't understand, that thing is positively ruined. I hate to see it happening to our market the way it happened in Japan. It isn't easy to make money in stocks. Not at all. You need a professional house like Glass & Stem & Toothpick to provide you with the proper mix of investment exposure."

Ms. Martini, you claim that investing isn't easy, but isn't it true that the stock market has only ever risen over its history? Isn't that true? The S&P 500 has achieved approximately 11% annualized gains since 1926. In fact, the market has advanced for over 100 years and counting. So, couldn't any investor simply buy an index fund and capture that 11% gain, over time, and thereby beat over 80% of the professionals? Contrary to what you just said, that sounds incredibly easy to me. Am I being too logical?

"As a matter of fact, you are. That's a little too logical for its own good, Jack. You're actually misleading the people with that statement."

How's that?

"Well, because the stock market could decline for the next five years and the index fund would decline with it."

Yes. But what about after ten or twenty years?

"What about it, Jack?"

An index fund owner would eventually come out ahead, I'm saying, both in dollars and in sense -- apologies for that play on words -- because they'd match the market's return and they'd beat the pros in the end. So investing isn't difficult. It's extremely easy. Wouldn't you say? All that anyone needs is an index fund, time, and the discipline hold on.

"It's not that easy, Jack. Let me tell you something about it. At Glass & Stem & Toothpick, we run over twenty-seven mutual funds. Every one of them is run by a professional money manager who devotes the day and night to investing. Plus, we have resources that most of the people out there couldn't even dream of. However, twenty-six of our mutual funds have lost to the S&P 500 over the past five years, and all of them have lost to it for the past 10 years. If investing is so easy, explain that."

"This is John Smiley of Disgruntled & Gruntled. Ms. Martini, I can't believe that you just said that. If your company's mutual funds are underperforming the stock market, you don't make a public issue of it. Am I live right now?"

Yes, John, you are.

"Hello, everyone! This is John Smiley of Disgruntled & Gruntled Brokers."

Welcome to the conversation, John. What're your thoughts on the stock market?

"Well, first of all, I disagree with what Ginny said. At Disgruntled & Gruntled, we actually find it wonderful that individual investors are beginning to invest their own money. In fact, our goal is to help them. We're not a discount broker, we're a middle-service broker. That means we offer research and analysis. You pay more to invest with us, but you get more."

Great. Thanks for getting that out of the way. Actually, your introduction is a perfect segue into our first question for you, which is, how does your company plan to compete with all of the free research that can be found on the Internet? When people want to research a company, they visit message boards on a popular website and talk about it with other investors. Nobody needs to pay for just one guy's thoughts anymore. Everyone online can research collectively -- for free. Plus, most company information is available on the Internet, too.

"The problem with those message boards is some of it is bunk."

Sure. You can skip those posts.

"Well, that's not so easy as you make it sound. It takes time to flip around posts."

So you've used message boards?

"Well, I look to see what's out there, of course, but I really don't use anything. I look around is all. As for free information on the Internet, I assume that you mean company press releases and SEC forms. The problem with that is it's unfiltered information. It isn't analysis. We charge for our analysis."

But don't you believe, Mr. Smiley, that most investors can analyze free information well enough to know whether or not, for example, they want to invest in Microsoft?

"Don't buy Microsoft right now!"

It's Hip-Hop, the day-trader. Welcome to the column, Hip-Hop Tommy. How did your day of trading go? Why shouldn't we buy Microsoft right now -- the few of us who haven't successfully owned it for years already, I mean.

"Thanks for having me. I'd rather not talk about Microsoft today because I didn't make any trades in it today. It's a pretty good company, usually, but I didn't trade it today. Today I bought eBay (Nasdaq: EBAY) and Amazon.com (Nasdaq: AMZN)."

Why did you buy those stocks today?

"Because two brokerage firms -- I'm not sure if it was Glass & Stem or Disgruntled or any of those -- put out new buy recommendations on both stocks today. So, I bought them. With a new buy recommendation, a stock usually rises for the day."

And how did you make out?

"Well, I bought eBay near its high price and of course I sold the position before the market closed, so I lost money there. I made about $2 on Amazon. So, all in all, I lost money today."

Hip-Hop, did you know that Amazon announced a new music recommendation center today?

"They sell music?"

Amazon is the leading music seller on the Internet.

"They are?"

What are your life-long plans, Hip-Hop?

"What?"

Well, the snow is falling harder and we're failing to connect with all three of our guests. That's all the time that we have anyway, Fools. The Rule Breaker Portfolio sported very little news today, but we got an earful anyway, didn't we? In the end, the Port gained ground yet again (somebody stop this thing for a day, please), adding nearly 1% as it surfed the swell of the Amazon.

Be Foolish out there!

P.S. Play Stock Madness! 64 stocks... one "national champion." It could be you. Enter our contest to win a trip to Florida. Also, see today's Breakfast News for information about Microsoft's quest to end its antitrust trial.

What's up with Harry Jones today?

03/09/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +7 3/4  129.94
AMGN  -  13/16 67.44
AOL   -1       89.88
ATHM  +1 5/16 122.50
DJT   +  3/16   4.31
CHV   -1 1/8   79.94
CAT   -  13/16 48.81
DD    -  5/16  53.56
GT    -  1/16  51.94
IOM   -  1/8    5.38
SBUX  -1 1/16  59.81
TDFX  +  13/16  13.75
EBAY  -4 3/4  166.25

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +0.97%   6.44%  20.89% 1113.38%  72.22%
        S&P:     -0.23%   3.35%   4.44%  192.76%   26.36%
        NASDAQ:  -0.20%   4.59%   9.13%  232.27%   29.89%

Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     89.88    9788.87%
   9/9/97  1320 Amazon.com     6.58    129.94    1874.96%
  5/17/95  1960 Iomega Cor     1.28      5.38     319.79%
  12/4/98   450 @Home Corp    56.08    122.50     118.44%
  2/26/99   300 eBay         100.53    166.25      65.38%
 12/16/98   580 Amgen         42.88     67.44      57.29%
  4/30/97 -1170*Trump*         8.47      4.31      49.08%
   7/2/98   235 Starbucks     55.91     59.81       6.98%
  2/23/99   290 Goodyear T    48.72     51.94       6.61%
  2/23/99   300 Caterpilla    46.96     48.81       3.94%
  2/23/99   180 Chevron       79.17     79.94       0.97%
  2/20/98   260 DuPont        58.84     53.56      -8.98%
   1/8/98   425 3Dfx          25.67     13.75     -46.43%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 197725.00  $195725.53
   9/9/97  1320 Amazon.com  8684.60 171517.50  $162832.90
  12/4/98   450 @Home Corp 25236.13  55125.00   $29888.87
  2/26/99   300 eBay       30158.00  49875.00   $19717.00
 12/16/98   580 Amgen      24867.50  39113.75   $14246.25
  5/17/95  1960 Iomega Cor  2509.60  10535.00    $8025.40
  4/30/97 -1170*Trump*     -9908.50  -5045.63    $4862.88
  2/23/99   290 Goodyear T 14127.38  15061.88     $934.50
   7/2/98   235 Starbucks  13138.63  14055.94     $917.31
  2/23/99   300 Caterpilla 14089.25  14643.75     $554.50
  2/23/99   180 Chevron    14250.50  14388.75     $138.25
  2/20/98   260 DuPont     15299.43  13926.25   -$1373.18
   1/8/98   425 3Dfx       10908.63   5843.75   -$5064.88

                              CASH   $9924.87
                             TOTAL $606690.81

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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