Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Night Thoughts of a Classical Investor

By Yi-Hsin Chang (TMF Puck)

ALEXANDRIA, VA (March 11, 1999) -- Tonight I'm borrowing my title from Russell McCormmach's 1982 novel Night Thoughts of a Classical Physicist to bring you, fellow Fools, some random musings on investing. But first, headlines...

Amgen (Nasdaq: AMGN) finished up $4 1/8 to $74 5/8 after announcing it has signed an agreement with Cambridge, Massachusetts-based Praecis Pharmaceuticals for the rights to market the privately held company's prostate cancer drug abarelix. The deal will cost Amgen roughly $100 million in expenses this year, but because the company now expects product sales to increase "in the mid to high teens," it says it is "comfortable" with analysts' 1999 earnings projections of $1.80 to $1.85 a share. Long criticized for having few drug candidates in the late stages of development, Amgen said it could file for FDA approval of abarelix, now in Phase III trials, late this year. For more details, see today's Breakfast With the Fool.

Meanwhile, America Online (NYSE: AOL) gained $3 to $95 13/16 on news of a strategic alliance with baby Bell SBC Communications (NYSE: SBC) to provide high-speed connections to AOL's online service through SBC's asymmetrical digital subscriber lines (DSL). Members in California, Texas, Missouri, Oklahoma, Arkansas, and Kansas, where SBC companies Pacific Bell and Southwestern Bell provide DSL service, will be able to upgrade their service and connect to the Internet at speeds of up to 1.5 mbps -- more than 50 times faster than with a standard 28.8 kbps analog modem.

And finally, Starbucks (Nasdaq: SBUX) is thanking its customers tomorrow -- with free chocolate. That's right, customers visiting any outlet in North America will get a piece of Starbucks Mocha or Starbucks Dark Mocha, while supplies last. The company's giving away one million pieces of chocolate from its latest product line. So drop by your local neighborhood Starbucks tomorrow for a free sweet treat.

And those were the Rule Breaker headlines.

Following up on David Gardner's and Jeff Fischer's recent columns on stock splits, I wanted to add a few thoughts of my own. Consider this: You have a dollar. Would you prefer a $1 bill or four quarters? Hey, how about 10 dimes or 20 nickels or 100 pennies?! This is essentially what happens in a stock split. In a 2-for-1 stock split, you're trading in your dollar bill for two half-dollar pieces. Another two-fer later, and you've got four quarters when you once had that crisp $1 bill.

Unlike money, a share of stock is not better broken up -- you can't use it to make a phone call, buy a soda, or to do laundry. And judging from the number of pennies I have seen just lying around and haven't bothered picking up, people simply would rather have a dollar bill rather than 100 pennies. So why do so many investors cheer for stock splits, for their stock to be worth less on a per-share basis?

As David pointed out, a split often is a bullish indicator from management, and as Jeff added, stocks do tend to outperform the stock market in the period immediately before and after the split. But really, if you think about it, a split is more of an effect than a cause. A company has been doing well, and its stock has run up, and that's when the company's management decides to split the stock. It's like past dividends or historic stock performance -- you're looking in the rearview mirror. And as any mutual fund salesman can tell you, past performance isn't necessarily an indicator of future performance.

Call it irrational exuberance.

The media certainly contributes to the split mania. So, as Jeff mentioned, because investors believe a stock will soar after a split, they pile in and buy shares, thus driving up the stock price. Voila! A self-fulfilling prophecy. It's like an over-hyped IPO (initial public offering) or an also-ran "Internet stock" -- Books-A-Million (Nasdaq: BAMM) and K-tel International (Nasdaq: KTEL) come to mind. If enough people believe it, the price will go up.

It's like the whole Year 2000 problem. While I think it will be more of a glitch than a blunder (as I pointed out in a five-part series on the subject), I also recognize that the short-term effect on the market is dependent more on what investors believe will happen than on what will actually happen come January 1, 2000. While some might consider selling with the wave, others are planning to set aside some cash to take advantage of a once-in-a-millennium buying opportunity.

Not surprisingly, Ted Koppel asked Warren Buffett in a Nightline interview last week why he has never split Berkshire Hathaway (NYSE: BRK.A) stock. Buffett essentially explained that by not doing so, he filters out "people who think that a stock split is a wonderful thing. It doesn't have anything to do with the value of the business, like having a pizza that's cut into eight pieces instead of four pieces."

Some random closing thoughts...

With the Dow at a new all-time high, just a tad under 9,900, I'm personally watching for the Dow to hit 9,976. Why 9,976, you ask. Why not? It's as random as Dow 10,000. It's just that we like 10,000 because we like round numbers. We're culturally predisposed to like zeros. Well, I'll be waiting on the edge of my seat for the Dow to hit 9,976. Now, that'll be something. (Incidentally, Ralph Acampora of Prudential Securities is projecting the Dow will reach 11,500 by the third quarter.)

Buffett had another great quote from the other night: "People manage to live through Saturday and Sunday without getting quotes on their stocks. If the stock exchange closed for a year or two, for a real investor, it wouldn't make any difference."

That's hard-core long-term investing for you. Aside from making additional buys, would you pass Buffett's "real investor" test?

Hop on over to the Dell message board and join the discussion on the deal between Dell and Amazon. Also, check out the latest StockTalk interview with Cisco Systems. And remember, watch for Dow 9,976.

What's up with Harry Jones today?

03/11/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -2 1/4  134.88
AMGN  +4 1/8   74.63
AOL   +3 1/16  95.69
ATHM  -6 9/16 118.44
DJT   +  1/16   4.31
CHV   +1 13/16 85.06
CAT   +1 7/8   50.88
DD    +  3/4   58.13
GT    +1 1/2   52.19
IOM   +  1/2    5.50
SBUX  -  1/8   61.25
TDFX  -  1/16   14.06
EBAY  -5 1/16 150.00

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +0.65%  10.00%  24.93% 1153.95%  73.35%
        S&P:     +0.84%   4.79%   5.89%  196.65%   26.69%
        NASDAQ:  +0.25%   5.43%  10.01%  234.95%   30.08%

Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     95.69   10428.42%
   9/9/97  1320 Amazon.com     6.58    134.88    1950.01%
  5/17/95  1960 Iomega Cor     1.28      5.50     329.55%
  12/4/98   450 @Home Corp    56.08    118.44     111.19%
 12/16/98   580 Amgen         42.88     74.63      74.05%
  2/26/99   300 eBay         100.53    150.00      49.21%
  4/30/97 -1170*Trump*         8.47      4.31      49.08%
   7/2/98   235 Starbucks     55.91     61.25       9.55%
  2/23/99   300 Caterpilla    46.96     50.88       8.33%
  2/23/99   180 Chevron       79.17     85.06       7.44%
  2/23/99   290 Goodyear T    48.72     52.19       7.13%
  2/20/98   260 DuPont        58.84     58.13      -1.22%
   1/8/98   425 3Dfx          25.67     14.06     -45.21%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 210512.50  $208513.03
   9/9/97  1320 Amazon.com  8684.60 178035.00  $169350.40
  12/4/98   450 @Home Corp 25236.13  53296.88   $28060.75
 12/16/98   580 Amgen      24867.50  43282.50   $18415.00
  2/26/99   300 eBay       30158.00  45000.00   $14842.00
  5/17/95  1960 Iomega Cor  2509.60  10780.00    $8270.40
  4/30/97 -1170*Trump*     -9908.50  -5045.63    $4862.88
   7/2/98   235 Starbucks  13138.63  14393.75    $1255.13
  2/23/99   300 Caterpilla 14089.25  15262.50    $1173.25
  2/23/99   180 Chevron    14250.50  15311.25    $1060.75
  2/23/99   290 Goodyear T 14127.38  15134.38    $1007.00
  2/20/98   260 DuPont     15299.43  15112.50    -$186.93
   1/8/98   425 3Dfx       10908.63   5976.56   -$4932.06

                              CASH   $9924.87
                             TOTAL $626977.06

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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