Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Let Your Winners Run
The "10% of assets" seller

by David Gardner

ALEXANDRIA, VA (March 24, 1999) -- The Rule Breaker Portfolio continued down Wednesday, shedding 0.66% of its value in the face of strong performances by the market overall. The Nasdaq rose 1.83%, while the S&P 500 tallied a half-percent gain. Our portfolio was dragged down by weakness in Top Gun. No, I'm not talking about the 1986 Tom Cruise flick that won the Oscar for Best Music (who can forget "Take My Breath Away," eh?... OK, I admit. I forgot it. At least, until I heard it again.) No, Top Gun in the context of our portfolio is definitely America Online, which lost $3 3/8 today on a good day for technology stocks. Of course, beyond Top Gun, Amgen and @Home each lost $2+, further contributing to our underperformance.

How 'bout those Oscars, by the way. (A statement, not a question.)

OK, I think we've dispensed with that.

One of my favorite features of our new Foolish Portfolio Tracker is the ability to tally and sort by "Percentage of Portfolio," abbreviated as "% of Port." (If you are new to Fooldom, or if you are not familiar with how to use this feature, just drop us a quick note to Help@fool.com and we'll get you started.)

I highly encourage the use of this feature because it gives you a clear view of your movers and shakers. And because you can now sort the portfolio by any column, simply through clicking the hyperlink at the top, you can get a very clear view of this. If you type in and follow the Rule Breaker Portfolio, you'll find at present that AOL is 38.99% of our assets. And if you sort by this feature, the whole list goes like this:

AOL   38.99%
AMZN  24.71%
ATHM   9.26%
EBAY   6.60%
AMGN   6.47%
CHV    2.33%
GT     2.25%
DD     2.20%
CAT    2.09%
SBUX   2.07%
IOM    1.48%
TDFX   0.75%
DJT   -0.71%

(Trump is listed as negative since it's a short position.)

New readers may think, "Wow! Half the portfolio -- more than half! -- in two stocks?!" Yep. Emphatically so. Of course, we respond by saying, "How do you think it got that way?" I can assure you that it would be most unFoolish for us to have loaded up on positions of that size and scope -- to actually invest 25% or more of our assets in one stock. But we've never done that, and we never will. We have never invested any more than 10% of our assets in any single new position -- and in most cases, the amount we invest is closer to 5% than 10%.

So, how did AOL become 39% of what we hold? How did Amazon reach 25%?

Appreciation, baby. Those stocks earned their real estate, and we let them do it -- those gaudy mansions sitting on our property built themselves up over time through sheer performance. And that's the Foolish investment lesson for tonight.

Let your winners run.

I have told this story in the past, but it's worth repeating. I'm in an investment club in Washington, D.C. where I am younger than most of the members by about 30 years (they're my dad's generation). Some time ago we had one gentleman in the club habitually put his hand up whenever a given position exceeded 10% of the club's assets. The hand shot up about one or another stock every other month: "Berkshire Hathaway is now 12.3% of the portfolio, so I vote we sell enough shares to get it down below 10% again." Every time this happened, no matter what the stock or what the situation, the hand went up and the vote had to be taken.

What this gentlemen had advocated is constantly to sell off your best investments in order to put the money, more often than not, into poorer choices. (To say nothing of having to pay capital gains taxes all the time.)

He is today in Heaven, no longer with us, having moved (as I saw it put last night in an amusing post on our Women & Investing message board) to that "Great Investment Portfolio in the Sky." And yet I still picture him outside the Pearly Gates sitting there, throwing his hand up, suggesting that Heaven has performed so well that we should sell off a bit of it, put a little bit more Hell into our lives.

OK, I overstate humorously, but I overstate for a reason. This is not good investment practice.

Thank God that we have in fact held our winners, that we have given our Top Gun free rein and allowed it to strut around and land the movie deals. There is no way our annualized return would be anywhere near the 75% that it is if we hadn't stuck tight to our best decisions, come (as they say) Hell or high water. Or an analyst on CNBC who's "downgrading" the shares to short-term hold.

So if you have a portfolio that is unbalanced for the right reasons, don't view that as a negative or even as a positive. Simply accept it, and view it neutrally. Your challenge is then just to decide whether you believe in those things that are 39% and 25% of your assets going forward. All that matters to you or me as investors, at this point, is what happens from now on -- March 24, 1999 and every other market day that preceded it are now history.

Thus, do I feel comfortable sitting on AOL and Amazon.com with half my money? Absolutely. My tolerance for risk is much higher than average, but so is my belief in these companies. Now, what is right for me is not necessarily right for you. And if I were investing new money today, and I wasn't a customer of each, I wouldn't even touch those stocks. The more I live, the more I am convinced you should be a buyer of shares only in companies whose products and services you use, of which you are a fan. (If you have a friend who swears by the product, this is acceptable too, though it's a fallback choice.)

And this dictum accurately describes my own feelings, and my own approach to these two stocks. Of course, as more new investment opportunities present themselves, you can imagine that we'll sometimes be selling off portions of these winners to buy them. That's exactly how and why Amazon.com entered our portfolio, in fact -- we sold off some AOL to buy it.

(Sometimes, of course, we sell off our losers to buy a new stock. We exercise discretion and try to figure out how best to have our money invested. It's a subjective exercise for us each, and I'll just add that we do have a bias toward dumping losers rather than winners to establish a new position. The exception is if our winners have taken on a HUGE percentage of our portfolio; in those situations, we'll often sell them down a bit to maintain more diversity.)

This is the way WE invest. It is not the only way, but it is our way and therefore it behooves me to acknowledge that and explain it to you. If you have more thoughts on the subject, please feel free to drop by our Rule Breaker message board to contribute your own.

Also, we are running a charity auction on eBay this week, selling off the jester cap worn as we claimed the Webby award (the Oscars of the Internet) in San Francisco last week. All of the proceeds from the sale of this unique item are given to our charity of choice, Share Our Strength, to help fight hunger. If you're interested in bidding, or just checking out the auction, click here (or search eBay for "motley fool").

And finally, here's a great new feature in Fooldom: Each day on our Hot Topics page we identify our top conversation threads from our message boards. You can access that page from http://boards.fool.com every day. Here is an abridged selection of today's Hot Topics:

  • @Home vs. AOL -- Who Will Win the Access Wars?
  • Effects of a Microsoft Breakup
  • 12 Years of Market-Beating Returns?
    and
  • Go2Net and AOL -- Lone Eggs in the Basket...

...which is a discussion on the Go2Net board offering opinions to a reader who has his whole portfolio divided between these two stocks. (!)

For these and more of the best conversations in Fooldom every day, bookmark this page.

And Fool on!

-- David Gardner, March 24, 1999

What's up with Harry Jones today?

03/24/99 Close
Stock  Change    Bid 
---------------- 
AMZN  +4 5/16 123.69
AMGN  -2 1/16  73.75
AOL   -3 3/8  117.88
ATHM  -2      136.00
DJT     ---     4.00
CHV   -1 7/8   85.50
CAT   +  13/16 45.94
DD    -  1/2   56.00
GT    -  1/4   51.38
IOM   -  1/16   5.00
SBUX  +  7/16  29.06
TDFX  -  1/16   11.63
EBAY  -1      145.38

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -0.66%  16.22%  32.00% 1224.91%  74.68%
        S&P:     +0.51%   2.44%   3.52%  190.30%   25.87%
        NASDAQ:  +1.83%   3.38%   7.87%  228.43%   29.27%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    117.88   12869.69%
   9/9/97  1320 Amazon.com     6.58    123.69    1779.97%
  5/17/95  1960 Iomega Cor     1.28      5.00     290.50%
  12/4/98   450 @Home Corp    56.08    136.00     142.51%
 12/16/98   580 Amgen         42.88     73.75      72.01%
  4/30/97 -1170*Trump*         8.47      4.00      52.77%
  2/26/99   300 eBay         100.53    145.38      44.61%
  2/23/99   180 Chevron       79.17     85.50       8.00%
  2/23/99   290 Goodyear T    48.72     51.38       5.46%
   7/2/98   470 Starbucks     27.95     29.06       3.96%
  2/23/99   300 Caterpilla    46.96     45.94      -2.19%
  2/20/98   260 DuPont        58.84     56.00      -4.83%
   1/8/98   425 3Dfx          25.67     11.63     -54.71%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 259325.00  $257325.53
   9/9/97  1320 Amazon.com  8684.60 163267.50  $154582.90
  12/4/98   450 @Home Corp 25236.13  61200.00   $35963.87
 12/16/98   580 Amgen      24867.50  42775.00   $17907.50
  2/26/99   300 eBay       30158.00  43612.50   $13454.50
  5/17/95  1960 Iomega Cor  2509.60   9800.00    $7290.40
  4/30/97 -1170*Trump*     -9908.50  -4680.00    $5228.50
  2/23/99   180 Chevron    14250.50  15390.00    $1139.50
  2/23/99   290 Goodyear T 14127.38  14898.75     $771.38
   7/2/98   470 Starbucks  13138.63  13659.38     $520.75
  2/23/99   300 Caterpilla 14089.25  13781.25    -$308.00
  2/20/98   260 DuPont     15299.43  14560.00    -$739.43
   1/8/98   425 3Dfx       10908.63   4940.63   -$5968.00

                              CASH   $9924.87
                             TOTAL $662454.87

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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