Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Mr. and Mrs. Discobbolos
Edward Lear's nonsense, and the stock market

by David Gardner

ALEXANDRIA, VA (April 6, 1999) --

'It never occurred to me before--
'That perhaps we shall never go down any more!'

--Edward Lear, Fool

Up strong in the morning, the Rule Breaker Portfolio sold off the rest of the day, closing up a few hundred bucks. Hey, that's money -- no complaints, here. We don't have to get carried away with $10,000 gains (1%+) every day. Following a run of greater than 300% in just the past 7 months, I have no problems adjusting psychologically to "capital preservation mode." That is, I'm more than happy just to let my stocks sit there and lollygag for a while, chew the cud, whittle, compose doggerel. Speaking of which:

And both were as happy as happy could be--
� � � � � � � � � Till Mrs. Discobbolos said,--
� � � � � � � � � 'Oh! W! X! Y! Z!
� � � � � � � � � 'It has just come into my head--
'Suppose we should happen to fall! ! ! ! !
� � � � � � � � � � � � 'Darling Mr. Discobbolos

'Suppose we should fall down flumpetty
� � � � � � 'Just like pieces of stone!
� � � 'On the thorns, -- or into the moat!
� � � 'What would become of your new green coat
� � � � � � 'And might you not break a bone?
'It never occurred to me before--
'That perhaps we shall never go down any more!'


So wrote Edward Lear, who made a career of nonsense. And yet, was it?

Whimsy is a delightful word tossed out too infrequently these days; it must be one of my ten favorites in the English language. (I've always liked "balmy" as well -- perhaps even more so because I have only ever visited -- never lived in -- balmy places, adding to their balmy allure.) And the brief tale of the Clan Discobbolos is classic whimsy, classic Lear nonsense with its own lessons, of course.

But maybe not what you think.

The line above, and the context I'm giving to it, may appear to be a thoroughly naive statement from -- shall we say? -- a new investor in the market. The market has gone up and up and up for five years now -- with the occasional bump in the road -- but it's been the best consecutive five years in market history. Of some investors, particularly new investors, we may be wondering, "Has it ever occurred to them before that perhaps we shall never go down any more?"

In reality, I think very few members of The Motley Fool community are this wet-behind-the-ears, this naive. For however long we've been investing, I think most of us have our eyes wide open, realizing that these are special, special times, and that the market will have its spectacularly poor periods, too.

To further set the perspective, let's go back over recent history for a sec, eh? September first of last year, our account was valued in total at $196,459. (Remember that day? That was our impromptu showdown with the Dolans on CBS This Morning -- classic Fool moment!) Fast forward seven months and five days later, and we've upped the net worth of the real-money (woo hoo!) account to $870,299. One of the better runs of my and your investment career, I expect. As much as I'd like to gain 343% every seven months, I'm more than happy to rack up flat returns for the rest of the year, frankly.

"Hey, that's easy for you to say, Gardner," you may think, "but what about me who's reading this thing and has only just gotten started. I don't want to risk money on the stock market and see it do nothing for the next eight months."

And I don't wish it to play out that way. I obviously hope things do better than nuthin'. That said, if you're only investing for the next eight months, you shouldn't be investing in the stock market anyway. Fools invest money in the stock market that they absolutely won't be touching for at least five years, preferably a few decades. And we have watched so many of you in Fooldom make so much money that I know I'm speaking to a large number of people today who have benefited as much or more than I have, over the past seven months, the past five years, the past fifteen years, what have you. That's the whole point of this darned enterprise!

But back to Edward Lear, and the context of "Mr. and Mrs. Discobbolos." Mr. and Mrs. Discobbolos climbed up on a wall and had such a good time they resolved never to climb back down again. Consequently, they have lived most of their married life up on that wall. They have had, and raised, twelve children on that wall. No Discobbolos child has ever left the wall. In speculating, "Perhaps we shall never go down any more," Mrs. Discobbolos was NOT referring to the stock market. She was expressing anxiety that neither she, nor her husband, nor any of their children would ever leave their wall.

If I might apply this to where we find ourselves today, dear investors -- particularly new investors -- I would like to suggest that coming down from that wall spells risk, R-I-S-K (there). The wall is so high -- the market's performance has only made the wall higher -- so the notion that new investors would actually climb down off of it -- would take the risk to begin investing -- seems very daunting. Yes, yes! So says Mr. Discobbolos:

'But now I believe it is [W]iser far
'To remain for ever just where we are.'


I believe that too many investors believe "what goes up must come down." They believe that they should sit back and wait till the wall comes down a bit before ever considering jumping off. They get addicted to the wall,

For twenty years, a month and a day,
� � � Till their hair had grown all pearly gray,
� � � � � � And their teeth began to fall.


Their plight is understandable; we all can empathize with this resistance to risk. It's human nature, not wanting to come down from such walls. We are like this contributor to our Fool message board for Amazon.com, who feels like "the kid about to enter the double dutch jump rope. I'm looking for a little trough in the price to get in but haven't seen one yet."

But it helps to know, through the Fool network, that others have been there before. Whether you see what we do in our own portfolios (heck, Tom just added Yahoo! a few weeks ago to his), or the voices of thousands of others on our message boards, you can gain confidence in your decision-making (for or against) by interacting with others who have been investing for the long haul, believing that their investments will appreciate greatly.

Edward Lear, by the way, was the 21st of 21 children (!!!), and was as talented with a palette as he was with a quill pen. (Lear once gave drawing lessons to Queen Victoria.) Quite simply, Lear was a Fool -- not to be confused with Lear's Fool -- for he amused, educated, and enriched the lives of others through his unconventional and unWise efforts. And we see this in the unconventional way that Lear closes his Discobbolos nonsense poem. In fact, Edward Lear does the logical thing -- logical nonsense, if you will. Mr. Discobbolos finally drops down off the wall, digs a trench, fills it with dynamite, and

He lighted a match, and fired the train,
� � � And the mortified mountain echoed again
� � � � � � To the sound of an awful fall!
And all the Discobbolos family flew
In thousands of bits to the sky so blue,
And no one was left to have said,
� � � � � � � � � 'Oh! W! X! Y! Z!
� � � � � � � � � 'Has it come into anyone's head
'That the end has happened to all
� � � � � � � � � � � � 'Of the whole of the Clan Discobbolos?'

That, I believe, is exactly what will come of Wisdom, my friends. In fact, I think it's already happening, and faster than many in the financial services industry ever dared to fear.

But to close, this isn't so much about Wisdom or financial services, of course, but about walls, and our sometimes inability to climb down off them. I hope you are not unwilling to climb down yourself, whether it is to begin investing, or in any aspect of your life. If you're looking for a sure thing, forget it; we are climbing down walls and taking risks all the time, even as we cross a street. (Speaking of the decision to invest, remember the words of David Mahoney, Jr., who wrote, "You'll never have all the information you need to make a decision. If you did, it would be a foregone conclusion, not a decision.")

And I hope I myself am not sitting fat and happy atop any of my own walls right now, unwilling to change my own thinking. Let's keep each other honest.

I think whimsy helps.

Lear on,

David Gardner, April 6, 1999

What's up with Harry Jones today?

04/06/99 Close
Stock  Change    Bid 
---------------- 
AMZN  -3 5/8  182.88
AMGN  +  3/4   80.00
AOL   +  15/16 167.00
ATHM  +7 1/16 162.13
DJT   +  1/8    4.00
CHV   -1 1/16  89.56
CAT   -  11/16 48.38
DD    -1 3/16  58.25
GT    -  3/4   51.31
IOM   -  1/16   5.06
SBUX  -  1/16  30.75
TDFX  +  1/2    14.75
EBAY  +3 1/4  152.00

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +0.10%   9.11%  73.42% 1640.60%   84.41%
        S&P:     -0.24%   2.45%   7.53%  201.06%   26.63%
        NASDAQ:  +0.12%   4.12%  16.90%  255.91%   31.25%

    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    167.00   18274.87%
   9/9/97  1320 Amazon.com     6.58    182.88    2679.58%
  5/17/95  1960 Iomega Cor     1.28      5.06     295.38%
  12/4/98   450 @Home Corp    56.08    162.13     189.09%
 12/16/98   580 Amgen         42.88     80.00      86.59%
  4/30/97 -1170*Trump*         8.47      4.00      52.77%
  2/26/99   300 eBay         100.53    152.00      51.20%
  2/23/99   180 Chevron       79.17     89.56      13.13%
   7/2/98   470 Starbucks     27.95     30.75      10.00%
  2/23/99   290 Goodyear T    48.72     51.31       5.33%
  2/23/99   300 Caterpilla    46.96     48.38       3.00%
  2/20/98   260 DuPont        58.84     58.25      -1.01%
   1/8/98   425 3Dfx          25.67     14.75     -42.53%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 367400.00  $365400.53
   9/9/97  1320 Amazon.com  8684.60 241395.00  $232710.40
  12/4/98   450 @Home Corp 25236.13  72956.25   $47720.12
 12/16/98   580 Amgen      24867.50  46400.00   $21532.50
  2/26/99   300 eBay       30158.00  45600.00   $15442.00
  5/17/95  1960 Iomega Cor  2509.60   9922.50    $7412.90
  4/30/97 -1170*Trump*     -9908.50  -4680.00    $5228.50
  2/23/99   180 Chevron    14250.50  16121.25    $1870.75
   7/2/98   470 Starbucks  13138.63  14452.50    $1313.88
  2/23/99   290 Goodyear T 14127.38  14880.63     $753.25
  2/23/99   300 Caterpilla 14089.25  14512.50     $423.25
  2/20/98   260 DuPont     15299.43  15145.00    -$154.43
   1/8/98   425 3Dfx       10908.63   6268.75   -$4639.88

                              CASH   $9924.87
                             TOTAL $870299.25

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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