Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

The Foolish Four Reigns
Plus, the myth of objectivity

By David Gardner (MotleyFool)

ALEXANDRIA, VA (April 15, 1999) -- The markets for Tax Day 1999 will be remembered for their volatility. The Rule Breaker Portfolio fared poorly, losing over a percent of its value, but most of the day looked a lot worse.

Yep, At Home traded $15 lower than its close. Amazon, off $3/4 for the day, had been 16 bucks below that. Most of our stocks traded very similarly, except for eBay. Electronically Buy Anything spent most of the day up a few bucks, but posted a closing price of $178 7/8, up $16.

And once again, the Foolish Four came through with flying colors. Check these moves out:

Goodyear Tires   +5.58%
Chevron          +5.08%
Du Pont          +3.93%
Caterpillar      +1.85%

These are Dow heavyweights, ladies, gentlemen, and Fools. These are stocks that sometimes don't move much more than that in a year. Two days in a row of this. (For more on the Foolish Four, check out the Foolish Four report, which is hooked into an entire area devoted to our Dow approach.)

One of our more Frequently Asked Questions is why does the Rule Breaker Portfolio even have the Foolish Four in it? The past couple of days, which have involved an obvious rotation of money out of high-octane-growth stocks into companies whose business is mammoth and cyclical, makes our thinking clear. Two points, really:

1. The Foolish Four works. It's been a superb long-term strategy that hasn't been too hot for the past couple of years (not too cold, either -- just nothing special), but we don't believe the strategy is spoiled or irrelevant. The Foolish Four works, and you might be surprised to find out that it's now substantially outperforming the S&P and the Nasdaq this year:

Fool 4:   +24.29%
Nasdaq:   +15.05%
S&P500:    +7.94%

And the second point:

2. From a portfolio management standpoint, The Foolish Four provides a nice counterpoint to our high-risk approach to investing and to life. The Fool Four is your warm blanket, your [WARNING: BreakerPort product placement ahead] Starbucks grande mocha, your parent there on time to pick you up from school. We like these things, and in some ways we need these things to provide extra perspective, and occasionally to pick us up when we are down. That's why we'll continue to feature the Foolish Four in our portfolio. It reminds us that it's the easy first step to Foolish equity investing, returns you can garner mechanically, with little expenditure of time or emotion.

Quick, jarring transition: If you're looking for a five-minute, potentially side-splitting guffaw, check out the customer responses to our April Fool's joke, now collated and published. I giggled throughout. It's funny to see the comments of those who believed the joke, but even funnier to read the creativity of those who played along with it. So many great people out there in Fooldom....

OK, I made the joke about product placement earlier, but it reminded me of a message-board posting recently which (to paraphrase) said, "Hey, The Motley Fool is not an objective news source for the companies in its portfolios. It's hyping these stocks, like 3Dfx." Etc.

First of all, I would encourage anyone who thinks this way to ask himself if there is ANY such thing as an objective news source. I have been interviewed by many of "them," and I can tell you that I have rarely encountered more close-minded bias than among these "objective" interviewers. The classic example was a show on PBS (you might think of this as an "objective" network) called Frontline, whose pre-programmed agenda -- er, news -- was that whenever John Q. Public takes an interest in the stock market, this foreshadows a market crash. This aired three years ago.

Sic semper "objectivia."

(More of my Latin argot.)

There really is no objectivity when it comes to reporting. Even for something that looks balanced, the intelligent reader should be asking "What are they not saying? What are they leaving out?"

So that's the key first point. The second point has been self-evident to any reader of this space over the past five years: We are shareholders, overtly so, self-confessed. This is real money -- our money. There has never been any presumption about the Rule Breaker Portfolio recaps being objective or disinterested.

Does this mean, though, that we make stuff up, or hide the truth under a bushel, or write in order to "push up" our stocks? Anyone familiar with our company core values, the mission of our enterprise, or us personally, will see this is emphatically not the case. And linked in to every article in Fooldom is a message board where anyone in Fooldom can come in and challenge, further elucidate, uphold, or criticize anything we've written. This place reeks of accountability, and it's a very nice smell. It's more than a smell -- it's a way of life. We created Fooldom just that way, on purpose. That conversation with you is our greatest strength.

Of course, as long-term shareholders we frankly don't care about the short-term movement of our stocks. If 3Dfx is a good company, it will reward shareholders over the long term, regardless of what we write; if it is a poor company, we'll all underperform or lose money. The Fool certainly moves markets with each new buy or sell order, but this is by now an inevitable and fleeting effect that hurts, not helps, us. Our smallest cap company -- 3Dfx -- has been our worst performer. We've lost money on the very thing that would be easiest to "hype" (the word itself is repugnant to me).

I am a fanatical fan of North Carolina Tar Heel basketball, as a graduate of the university. But I clearly surprised a colleague of mine earlier today when I said two things: (1) Despite losing the championship game, [arch-rival] Duke clearly was the best basketball team in the nation, and (2) oh by the way, I despise Duke basketball. (I was a Tar Heel speaking to a Blue Devil.)

That you can actually be dispassionate and objective about the merits of something that emotionally engages you -- to some, this notion is incredible. But I know many people who are happy to tell you when they think your stock or your sports team is better than theirs. I'm quite happy (and have done this in the past) to tell you that I find my stock or my sports team sorely wanting. (Try being a Washington Redskins fan over the past five years.)

This is not about "objectivity" -- that will o' the wisp. This is questing after truth, even when the truth may hurt.

We don't have to define ourselves by -- and defend to the death -- our stocks, our sports teams, or even our own past actions. We should train our focus instead on the truth, love the truth, be seekers of the truth.

The Motley Fool's first core value (of our four) is uncompromising honesty. I hope that you'll embrace this yourself and keep us honest in our thinking and our actions, starting with me and running through every member of our Fool community. We pledge the same back to you.

To tie everything together, speaking honestly, I'm glad to have the Foolish Four in our portfolio.

(And for Duke fans, I still think Wojo was classically overrated, in the most Dukie-like way!)

Fool on,

David Gardner, April 15, 1999

What's up with Harry Jones today?

04/15/99 Close
Stock  Change    Bid 
---------------- 
AMGN  -3 3/16    68.88
AMZN  -  3/4    167.25
AOL   -5 1/2    144.50
ATHM  -6 9/16   152.50
CAT   +1 1/16    61.75
CHV   +4 5/8     95.75
DD    +2 11/16   67.94
DJT   -  3/8      3.88
EBAY  +16       178.88
GT    +3         56.75
IOM   -  1/8      5.00
SBUX  +1 1/16    32.56
TDFX  -  7/8     21.00


                  Day     Month  Year   History   Annualized 
      R-BREAKER  -1.23%   1.58%  61.44% 1520.41%  81.04%
        S&P:     -0.42%   2.84%   7.94%  202.14%   26.57%
        NASDAQ:  +0.61%   2.48%  15.05%  250.30%   30.62%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    144.50   15799.21%
   9/9/97  1320 Amazon.com     6.58    167.25    2442.09%
  5/17/95  1960 Iomega Cor     1.28      5.00     290.50%
  12/4/98   450 @Home Corp    56.08    152.50     171.93%
  2/26/99   300 eBay         100.53    178.88      77.94%
 12/16/98   580 Amgen         42.88     68.88      60.64%
  4/30/97 -1170*Trump*         8.47      3.88      54.24%
  2/23/99   300 Caterpilla    46.96     61.75      31.48%
  2/23/99   180 Chevron       79.17     95.75      20.94%
  2/23/99   290 Goodyear T    48.72     56.75      16.49%
   7/2/98   470 Starbucks     27.95     32.56      16.48%
  2/20/98   260 DuPont        58.84     67.94      15.45%
   1/8/98   425 3Dfx          25.67     21.00     -18.18%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 317900.00  $315900.53
   9/9/97  1320 Amazon.com  8684.60 220770.00  $212085.40
  12/4/98   450 @Home Corp 25236.13  68625.00   $43388.87
  2/26/99   300 eBay       30158.00  53662.50   $23504.50
 12/16/98   580 Amgen      24867.50  39947.50   $15080.00
  5/17/95  1960 Iomega Cor  2509.60   9800.00    $7290.40
  4/30/97 -1170*Trump*     -9908.50  -4533.75    $5374.75
  2/23/99   300 Caterpilla 14089.25  18525.00    $4435.75
  2/23/99   180 Chevron    14250.50  17235.00    $2984.50
  2/20/98   260 DuPont     15299.43  17663.75    $2364.32
  2/23/99   290 Goodyear T 14127.38  16457.50    $2330.13
   7/2/98   470 Starbucks  13138.63  15304.38    $2165.75
   1/8/98   425 3Dfx       10908.63   8925.00   -$1983.63

                              CASH   $9924.87
                             TOTAL $810206.75
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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